Market Outlook – 06 March 2009
The continuing flow of panicky economic, corporate and financial news has finally driven equity markets below support levels. The FTSE-100 index had held above 3830 since November, raising hopes that it was forming a base, but this week slid to a closing low of 3512. Technically, 3830 is now a resistance level and the 2003 low of 3270 is the next support level.

Dividend cuts from GE in the US and HSBC in the UK have raised fears of more widespread reductions as companies try to conserve cash. HSBC announced a record £12.5 billion rights issue. More cash calls are inevitable and some will not get away without difficulty. That said, the yield on the FT All-Share index is now 5.8% and the PE ratio around 7.4, so that it can be argued that substantial falls in earnings and dividends are already priced in. The yield on the 10-year gilt has actually fallen over the last month from 3.75% to 3.55%, and sterling has held up well considering the prospect of huge issues of gilts over the years ahead.

Nobody can predict what will happen next. Economists’ computer models are out of their parameters (which is partly why recent Treasury projections have been hopeless). However, the monetary easing which is taking place should have some effect in the US by mid-year and in the UK by end year. The massive US fiscal stimulus should kick in as well. There is a rising danger of protectionism, particularly in the US and Europe. The Eurozone is experiencing severe strains which are likely to get worse as so many European countries, from Ireland to Ukraine, are in deep trouble. The UK at least has the safety valve of being able to reduce its currency, which assists monetary easing and will in due course help exporters.

While the immediate outlook in the UK remains grim, there are several factors to lighten the gloom. The reduced cost of fuel, energy and lower mortgage interest payments are helping household budgets and consumer spending. There have also been some signs of settling in housing activity. While accepting that there is potential further downside to the equity market, we continue to advocate sticking to stocks yielding comfortably over 4% which are likely to hold or increase their dividends. BP now yields over 10% and Royal Dutch Shell 8.5%, and we expect oil prices to recover over the next year. Such shares should be in the vanguard of the recovery when it comes. Sectors containing similarly attractive equities are utilities, aerospace and defence, mobile telecoms and pharmaceuticals. Excellent value can also be found in corporate bonds of blue-chip companies (BT’s 5.75% Loan 2028 offers a yield to redemption of 8.46%). For those who can accommodate more risk, UK life insurers, which offer a geared play on the market, are providing a once-in-a-lifetime opportunity.

Reproduced with permission from Miles Moseley, Managing Director of Capel Court PLC