Viewed simply compared with where it started the year, the UK stockmarket appears to have made further steady progress, rising by around 10% at the time of writing. This would not tell the whole story, however, as within an eight week window, during late May to late July, share prices were in fact subject to a bout of extreme volatility.
The primary cause of this was comments from the US Fed’s Chairman Ben Bernanke, which led investors to worry that the printing presses may be about to be switched to a lower gear (or even turned off) and therefore the huge liquidity injections that have underpinned asset prices in recent years may not provide such support going forward.
The ensuing sharp sell-off was sufficient to unsettle central bankers; they soon back-tracked and attempted to soothe (albeit with words rather than actions) and gradually equity markets around the world recovered their poise. This does however serve to illustrate how dependent investment markets have become on the loose monetary policy of the post ‘credit crunch’ years and the bigger worry is, perhaps, that this is equally true of the global economy itself.
Whilst economic conditions in the developed world have undoubtedly improved, there are now signs that the emerging economies are struggling a little as money flows out of these regions given the prospect of higher interest rates in the USA. Here in the UK, we are seeing early signs of conditions in the property market that could lead to another housing bubble. Disappointingly the public obsession with property extends to the UK government whose ill-thought stimulus measures only exacerbate the problems of affordability. These stimulus measures will of course help the banks in which the government are big shareholders to feel a little more relaxed about the stock of mortgages that they own!
Europe is likely to return to centre stage soon, as the German elections are concluded and the need for a fresh bailout for Greece in 2014 becomes apparent. The US debt ceiling is also likely to be breached again in the near future. Given uncertainty regarding the effects of a gradual withdrawal of QE support measures referred to earlier, combined with unsettling geo-political issues such as those in Egypt and Syria, markets still have the potential to be extremely volatile going forward. For this reason, we continue to hold a fairly cautious outlook.
UK equity valuations in general terms are on balance probably neither cheap nor dear currently. Many commentators opine that they are cheap relative to Gilts, however, we would contend that this is because the latter are expensive by historic measures. Future earnings reports could provoke disappointment and we therefore continue to prefer those stocks and sectors that have pricing power and which trade on reasonable PE ratios and offer attractive dividend yields.