If you think the Rally can’t Continue – You’re Wrong

THE SUN is shining and the markets are rising: a combination I can’t remember seeing since about 2005. Or at least it feels like that after a few tough years.

While the markets appear to be in bullish mood, I’m afraid economists are not and the resounding message I’m getting from my friends in the City is that there is still a lot of work to be done before a sustainable recovery is underway.

As Sir Mervyn King counts down the final weeks of his tenure as Bank of England governor, he’d be forgiven for feeling relieved that it will soon be someone else’s responsibility to save the UK economy. Speaking on Radio 4’s Desert Island Discs on Sunday, he describes the last five years (and counting) as “the biggest financial crisis the world has ever seen”.

I’m told it is almost certain that his successor Mark Carney will set the printing presses rolling again once he’s in place at the beginning of July, using more quantitative easing to drive the pound lower in a bid to increase exports. This will probably be for the best because the Government’s deficit reduction programme has received mixed reviews of late.

The International Monetary Fund called for a temporary austerity holiday, while the Organisation for Economic Co-operation and Development urged a rethink on the decision to ring-fence large parts of public spending, including the NHS. The OECD also downgraded the UK’s growth forecasts for both this year and next, although downgrades in the eurozone and global downgrades were larger. This negativity has not been reflected in the stock market, however, although the runaway rally has had a few wobbles following weak data from China. The FTSE 100 has now risen for 12 months in a row and a friend of mine, a chief executive of a global business managing £30bn of funds, believes it’s not over yet.

Many agree and even those talking heads at Credit Suisse are arguing that cyclicals are still undervalued by about 5%. My fund manager friend said that private investors are yet to come back to the market with a vengeance, which is often cited as a sign of a market top. Asset managers are also sitting on a large pile of cash and with interest rates set to remain in the doldrums for quite some time, the only thing offering yield is equities.

We’re lucky in the UK compared with the rest of the world since there is a tradition here of paying large dividends. US pay-outs, for example, are miniscule in comparison. Add into this soup some quantitative easing by central banks and there is a wall of money supporting the stock market. The stock market is supposed to be a leading indicator and is meant to reflect conditions nine or so months ahead. Corrections are normal and healthy and there is bound to be a pull back some time soon. That would be the time to pounce.

That’s all for now, I’m off for a walk through the City to try and catch some rays. By the time you read this it will probably be snowing but let’s keep our fingers crossed for a glorious British summer…

Until next time.

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