A MERE BLIP ON THE HORIZON
As one astute market watcher commented to me last week: "You know there's nothing really wrong in ...
As one astute market watcher commented to me last week: "You know there's nothing really wrong in the stock markets when it makes the main BBC news at 10pm."
On that basis alone we are at our most positive on the outlook for the markets since last September and it's not as irrational as it might at first seem.
Think back less than three years to the collapse of hedge fund LTCM or the Russian debt crisis and the BBC News kept talking about "meltdown" in the world's stock markets.
Meltdown whatever that really is never came and these two incidents proved to be mere blips on the bull run.
That the bull run is over for now at least is one point we are all agreed on, but when the bear market ends and another bull run starts is really the key point. My view as a renowned bull is that we are maybe only a matter of weeks from the end of this bear run.
It is at this point that you can trace the start of the narrowing of the market with only a few sectors namely the TMT sectors showing positive returns. It was also the point at which the old versus new economy debates gathered pace and became an almost accepted topic of conversation.
Mike Lenhoff, the chief portfolio strategist at Gerrard, until recently known more familiarly as Capel Cure Sharp, recently produced an excellent piece of research which looks at the way the FTSE 100 is apparently being held back because five sectors occupy a "disproportionately large share" of the capitalisation of the UK equity market. The big five banks, telecoms, oil and gas, pharmaceuticals and media between them account for 58% of the FTSE 100, while the five largest sectors only account for 25% of the S&P500.
Equally there is a very low correlation with the UK market between these sectors. As Lenhoff puts it: "These features mean that even if interest rates fall further, of even if TMT rebounds, the FTSE 100 is likely to do
no more than trade sideways for an indefinite period."
Bad news you might think. But there is a positive note in the way Lenhoff concludes namely that leadership within the market seems to be swinging towards economically sensitive sectors. It is these sectors that prove, after TMT is stripped out, that the index is actually getting higher. Our less academic view, which reaches much the same conclusion, is this: we are virtually at the end of the bear market in the UK and the market will begin to turn for the positive by May in time for the election, maybe even beforehand.
Now is the time to raise cash, identify those sectors you like and prepare to invest. If you don't you will kick yourself by the end of the year that you have missed an exceptionally strong rally that could see the market rise by 20% to 30% from this level.
Lawrence Gosling
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