22 June 2009

Rising markets driven by global themes
Article written by Hugh Duff, Senior Investment Manager UK equities, for Investment Week

The UK stock market has been led by global themes over the last few months. There is considerable debate over the sustainability of the market rally, as witnessed by previous commentators. Will the "green shoots "grow roots?

Whatever the actual answer, the stock market has been rising, driven by positive economic data and newsflow. Most positive has been recent economic data from China, but there have also been positive signs from the US and the UK.

Taking a step back, the fundamentals have improved, but from a very low base. Lower mortgage rates, energy costs and a devalued pound have provided some impetus to the UK economy but the sustainability of this requires a functioning banking system. With the BoE announcing a further £50bn to its asset purchasing programme, it is clear that those in the know feel the economy requires more help.

Consumer and corporate deleveraging is likely to continue, despite the rise in the UK savings ratio. Even the UK housing market, which has shown some signs of stability, remains weak. Rising unemployment and energy prices will also act as a drag.

Consensus bottom-up estimates show profits increasing by 15% - 20% in 2010. While we feel the economy will improve next year, it will take some time to feed through to profits. Accordingly, these forecasts represent a challenging target.

After a strong rally from the lows in March the market is now closer to fair value. But while the questions over global demand remain unanswered, we feel that the outlook remains subject to considerable uncertainty.

Bull

-           Fundamentals are improving from a low base
-           Coppock suggest a new bull market

Bear

-           Unemployment and oil prices are rising
-           De-leveraging is not yet over

Published in Investment Week

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