Professional investors are rarely happy to sit on the fence. They tend to be optimistic or pessimistic, but it seems that, at the moment, there are an equal number of investors in both camps because, in the past six months, the FTSE100 has moved from around 6,600 to 6,800, only 200 points.
The lowest point in that period was 6,445 in December 2013, and the highest point was 6,865 in February 2014. Currently, the level is 6,865 as I write this, so it is probably safe to say that the recent European elections do not appear to have had much of an impact on investors’ attitudes to the potential or otherwise of markets in the future.
So why are investors in two minds at the moment? Well, it would seem that the answer lies with the current messages that are coming from the Bank of England in that some investors were having difficulty in interpreting the new Governor’s ‘forward guidance’ policy. They misinterpreted the first message to read “interest rates are going to rise sharply”, whereas subsequent forward guidance messages have spelled out that the interest rates in May 2015 are not likely to be more than 1%, so the markets have taken a deep breath, wiped their brows, and bought back into the gilts that they had panic sold in 2013.
So the FTSE 100, which is an equity market, has see-sawed over the past six months but not by any great degree, and my perception of fund managers’ expectations is that they expect more good news stories to emerge over the next 12 months in the lead-up to the election. This should convert into a stronger economy and stock market.
The other story doing the rounds at the moment is that of a property bubble.
However, information released yesterday, shows that the controversial help to buy scheme where home buyers are loaned money from the Government to fund the deposit to buy a house represented only 3% of all mortgages arranged over the past 6 months and of this 3%, only 5% were in London, where house prices have risen exceptionally recently.
The inference to this is that the help to buy scheme is not fuelling a property price boom and it was pointed out to me by one fund manager that when you consider that prices in the rest of the UK have yet to rise to the same level as before the 2008 crisis, there is probably nothing to worry about.
The final point that could affect stock markets are the problems in the rest of the World, and a summary of the reports that I have read from fund management groups is:
- Low quality investments (example: Facebook that doesn’t produce a profit) have outperformed high quality ones in 2013, and most fund managers have steered clear.
- The US Dollar has been strong against most other currencies except the Euro and Pound Sterling, which pushes up the prices of goods from places other than the EU, so benefits us rather than the traditional low cost markets of the Far East.
- Inflation does appear to be under control at the moment, although there is a question mark against the final effects of Quantitative Easing (printing money).
- Shale gas in the US has reduced America’s dependency on Middle Eastern oil and this could mean they do not have an appetite to be the World’s police force, tending to let countries sort out their own problems rather than wading in to protect ‘their’ oil fields. The problem with this, of course, is the potential for extremists to have a greater hold, but the one comfort I take is that most deprived people have seen how things could be and that people power can achieve a ‘better’ life, eventually.
- There is an expectation that gilts and bonds – which have had a 20+ year bull market – will be less attractive as the World emerges from the recent depression and moves towards normality. This should benefit equities, especially as the only other alternative, cash, will still only be providing minimal returns for some time to come.
- Property appears to be in fashion again in the context of fund management, this means commercial property such as retail parks, warehousing and offices.
I will be introducing one or two property funds into my model portfolios again and these will be funds that own the assets with no mortgages. The holdings will be minimal to start with and may rise gradually over time. An exposure to property will increase diversification away from equities and bonds thus reducing risk.
I am also looking at replacing a couple of the multi manager funds in the income portfolios with other new types of funds that aim to provide income without the inclusion of bonds. I have used one or two of these in the past with excellent results.
The purpose of the changes is to reduce the reliance on bonds to increase the income and to increase the use of the individual capital gains tax annual allowance, making more income with less tax.