In These New Times

A new paradigm for a post-imperial world

Investment watch: Don’t join the FTSE optimists now

Posted by smeddum on August 24, 2009

By Daniel Grote

24 August 2009


The current rally may well have come too far, too fast.

In the days when football was played by real men, rather than £80 million prima donnas, there was a remedy that could be relied on to treat almost any injury: the magic sponge. Whether you’d sprained your ankle, broken your leg or whacked your head, the good old magic sponge would sort you out, son.

‘Chinese growth’ seems to have attained a similar status in the markets: it’s the catch-all remedy to almost any economic woe. It’s being used by some fund managers to explain why, even when all the domestic economic news can be filed under ‘bad’, there is still a positive outlook for the FTSE. A third of the profits of FTSE 100 companies are made overseas and so, even while British economic prospects remain grim, Chinese demand for their products will help push the index higher, runs the argument.

But those Chinese consumers had better get their wallets out pretty quickly, warned Olivier Blanchard, chief economist at the International Monetary Fund, last week.

The good news from Blanchard was the global economy is in recovery: although it will shrink 1.4% this year, it will expand by around 2.5% in 2010. The recovery is being driven by the huge stimulus packages being pushed through by governments around the world. But, for the recovery to persist, demand needs to pick up, Blanchard argued.

In the US, consumers have been saving more and are unlikely to revert to their pre-crisis spending habits, so the US needs to focus on exports. But if it is to rely on exports, demand from the Asian economies must pick up and Asian consumers must start to spend some of their savings.

Does this rally have stamina?

What does this all mean for UK markets? At the very least, it places a question mark over the sustainability of the rally that has been going on since March.

Fund managers are right to point out that a lot of the FTSE 100 is overseas facing. However, a lot of it isn’t and, given the news about unemployment and the likelihood of tax hikes, companies relying on the UK consumer for their profits aren’t likely to be in for a good time. And for companies that do make their profits overseas, some of their success will depend on there being a seismic shift in the balance between consumption and savings in Asia.

’m minded to side with Midas’s Martin Gray, who was one of the most successful fund managers in helping to protect his investors from the meltdown in the markets last year. He is pretty pessimistic in his outlook, not just for the UK economy but for the markets as well. He thinks the rally has come too far already and is worried that sentiment is becoming just as irrational now as it was in 2007, when all assets were being priced upwards.

If Gray is right, that bodes ill for the increasing numbers of investors with a renewed appetite for risk. Fidelity FundsNetwork released its sales figures for direct investors in July last week showing UK equities to be the best selling sector on its platform for the first time in almost a year.

It’s hardly the definitive statement on investor sentiment, but it is worrying. It’s been a heady time for investors since March but now might not be the best time to join the ride.

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