This feature is part of our FREE daily Money Morning email. If you’d like to sign up, please click here: sign up for Money Morning
The press seems to be growing increasingly bearish on the economy in general.
The latest interest rate rise has seen a flurry of pieces warning of the high cost of fixed-rate mortgages, the likelihood of more people going to the wall, and the soaring levels of business among companies that buy houses from distressed sellers then rent them back.
But what about the stock market? The business section of this morning’s Telegraph carries a story headed, “Shares predicted to break through the 7,000 level.”
That would take the FTSE 100 to its highest ever – higher than during the dotcom boom.
Against a backdrop of roiling housing markets on both sides of the Atlantic – not to mention throughout many parts of Europe – is this likely?
Equity analysts at Lehman Brothers and JP Morgan reckon that global stock markets could hit fresh highs over the next six to 12 months.
Now remember we are talking about equity analysts here – they do have something of a vested interest in taking a more optimistic view of the stock markets. But they make some compelling arguments.
Philip Aldrick reports in The Telegraph: “Underpinning the market is a net $2,347bn cashed out of global equities in the past year through dividends, share buybacks and company sales.” That figure also takes into account the amount of money reinvested in new share issues.
Ian Scott of Lehmans says: “We’ve never seen anything like this. There has been more money coming out than going into the market. There is more than enough liquidity to absorb current levels of issuance.”
He also points out that stock market valuations remain “undemanding” compared to “other asset classes.” This is a fair point, if only because most other asset classes – property and bonds, mainly – look massively overvalued.
There’s also the interesting point of sovereign investment funds (that is, investment funds held by governments, notably China) becoming more interested in investing in a wider range of assets. That’s a lot of money out there, and as James Ferguson recently pointed out to me, if those kinds of investors decide to get into shares, it’s the big blue chips that benefit, rather than the mid-caps.
Where it becomes a little more muddy is when both groups argue that the fall out from the collapse in the collateralised debt obligation (CDO) and US subprime mortgage markets will be short term and contained. We very much have our doubts as to whether this is the case, and we are far from being the only ones.
We’ve been writing about why for a while. If you want to read an excellent, ‘plain English’ summary – as one grateful reader described it – of exactly what CDOs are and why they could be a problem for ordinary retail investors as well as the hedge-fund high-fliers, then click here for Paul Tustain of BullionVault‘s rough guide to our next big potential financial crisis: Subprime collapse: why Bear Stearns is just the start.
Anyway – while it’s true that blue-chip equities look more attractive than many other asset classes, the worry is that any major problems resulting from a credit crunch could hammer confidence across all classes, inexpensive or not. And in reality, the most attractive-looking stocks are mainly the ‘mega-caps’ – the very largest companies in the FTSE 100.
Now you can gain access to the biggest stocks in the FTSE 100 by buying a tracker fund – the biggest stocks account for a huge proportion of the Footsie’s value, so trackers are concentrated in the mega-caps anyway.
But a better idea might be simply to pick and choose which ones you like the look of. We’re keen (as always) on the big oil and mining sectors, and pharma looks as though it might be worth a look too. On the other hand, with rising interest rates and the CDO cloud hanging over the financial sector, the big banks might be vulnerable and retail stocks are out.
James picks out one of his very favourite blue-chip stocks in the current issue of Money Week. It’s a pretty compelling case – he reckons this stock could gain around 50%, and that‘s a conservative estimate. Subscribers will no doubt have already looked at the piece, but if not, you can view the latest issue online here: Latest Issue.
If you’re not already a subscriber, you can sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the wider markets…
Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: Money Morning
In London, stocks ended Friday in the blue as the strong start across the Atlantic boosted sentiment. The blue-chip FTSE 100 closed 49 points higher, at 6,690, with miners Vedanta Resources, Xstrata and BHP Billiton leading the way with gains of over 3%. For a full market report, see: London market close.
Across the Channel, the Frankfurt DAX-30 added 61 points to end the day at 8,048 whilst the Paris CAC-40 was up 41 points at 6,102.
On Wall Street, the tech-heavy Nasdaq closed at 2,666, a 9-point gain. The Dow Jones was 45 points higher, at 13,611. And the S&P 500 was up 5 points to 1,530.
In Asia, the Nikkei hit a seven-year high of 18,261 today, having added 121 points.
Crude oil was at $72.44 this morning, whilst Brent spot was last trading at $77.16 a barrel.
Spot gold had risen to $654.50 this morning and silver was at $12.69. For a more in-depth gold market report, see our section on investing in gold.
In the currency markets, the pound was at 2.0127 against the dollar and 1.4772 against the euro, whilst the dollar was at 0.7337 against the euro and 123.34 against the Japanese yen.
And in London this morning, Premier Foods forecast annual profit in line with managers’ expectations and announced the sale of a frozen foods unit. The announcement comes after the company revealed last week that it was to close six factories in order to cut costs. Shares in Premier Foods were down by as much as 3.8% in early trading.
And our two recommended articles for today…
What will the latest rate hike mean for the UK economy?
– The Bank of England’s rate hikes are at last beginning to have noticeable effect on the UK economy. Jeremy Batstone assesses the likely impact of the latest rise on house prices, consumer spending and corporate Britain. To find out whether further hikes can be averted, click here: What will the latest rate hike mean for the UK economy?
Why I’m in no rush to join the private equity club
– Just as private equity is beginning to open up to retail investors, the conditions that underpinned its investment strategies are starting to unravel. Merryn Somerset Webb explains why this exclusive ‘club’ is no longer looking so special – and picks a far more attractive home for your money – here: Why I’m in no rush to join the private equity club