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27th May 2014

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Darius McDermott, Managing Director

Opinion on where equity markets are headed is really quite divided at the moment. On the one hand, Richard Buxton of Old Mutual, a very experienced and successful UK equity manager, whose UK Alpha Plus fund holds an Elite Rating, has said he believes we could be at the beginning of a long-term bull market. The guys at Neptune are equally bullish.

On the other hand, Stewart Cowley, also of Old Mutual, and another very experienced and successful manager, has been reported as saying that it might be time to take your profits and run. I bet discussions there are quite lively at the moment! Stewart is concerned that now central bank liquidity is coming to an end (money printing is coming to an end), markets could suffer a difficult period as they come off what has become a very addictive drug.

Looking at a 20-year graph of the FTSE 100, it does appear that the UK market is at a crucial juncture. It shows very clearly a 'triple-top': the market has reached a peak of 7,000 (or very close to 7,000) on three occasions now – December 1999, June 2007 and today. After the first two, it fell to around half the value – to a level of around 3,300 in March 2003 and 3,600 in March 2009. But what will it do this time? Will 7,000 prove once again to be a level of strong resistance, followed by a significant market correction? Or will we finally break through the glass ceiling?

Artemis made the point last week that the most recent bull market that began in March 2009 has already seen some sharp corrections. The first was in the spring of 2010. The worst (so far) was the summer of 2012.

The corrections have lasted from 27-154 days. Sell-offs since have been shorter and shallower. All were in response to macro economic matters which threatened to be recessionary. When they proved otherwise, the bulls charged back.

The recent jitters have not been a reaction to renewed economic weakness in Europe or disturbing news about China’s financial stability. Investors have pretty much ignored events in the Crimea and Ukraine – as they have the emerging markets crisis at the beginning of this year, which turned out to be a great opportunity for value investors to buy cheap EM stocks. So market volatility at the moment isn’t macro-driven, and that, according to Artemis, makes a ‘relief rally’ less likely.

I'm a little more positive than that. No one really knows how it will all play out but, in the short term, I believe any sustained market rally in the UK needs to be driven by the mega caps – the biggest 20 companies. There is little evidence yet that this will happen, apart from a slight pick up in merger and acquisition activity. If we are to finally break the 7,000 barrier, earnings need to come through, and the big companies need to lead the way. Any disappointing earnings will be punished.

Personally, I think that the FTSE will remain in its current trading range between 6,500 and 7,000 for a while longer, but I do think we will break the 7,000 barrier - and stay there - eventually. Not exactly a raging bull market, but going in the right direction!

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.