Market Outlook – 17 August 2010
As suggested in last month’s Market Outlook, the FTSE-100 Index proved to be oversold and has rallied from 4,806 on 1 July, to just over 5,400 on 09 August (the top end of our expected trading range), before drifting back to circa 5,300 today. In general the flight to safety in the UK market continues. The yield on the 10-year gilt has fallen further from 3.36% to 3.15% and defensive sectors of the equity market, like utilities and telecoms, are outperforming the cyclicals.

Generally, the UK has been recovering well. Q2 GDP growth was 1.1%, well above most forecasts. Industrial production and exports are rising strongly. The major banks all reported strong H1 profits – even Lloyds and RBS have returned to profit. Finally unemployment actually fell by 49,000. However, the housing market is showing signs of wobbling, possibly as a result of the Government’s austerity measures.

Our main focus at present is the outlook for the United States. The UK stockmarket is unlikely to make headway if US markets are weak, and Wall Street is increasingly worried. The Obama administration is looking anti-business and anti-banking in its quest for votes. In contrast with leading European countries, the US is continuing to borrow and spend, with little apparent benefit to the economy. Payroll figures continue to disappoint and the housing market is weakening again. The President’s intemperate attacks on BP have not helped sentiment.

Further out, we are still concerned about the Greek situation, but for the moment its austerity measures appear to be working, with IMF and ECB support. The Eurozone as a whole has been helped by the weaker Euro, but the main beneficiary has been Germany, whose economy has powered ahead on the strength of its soaring industrial exports, and whose stock market, uniquely among leading markets, remains in a firm uptrend.

Short term, provided Wall Street holds up, we hold to our view that the FTSE-100 Index will consolidate between 4,800 and 5,400. Longer term, yielding 3.5% and on a trailing PE ratio of 13.5, with earnings continuing to rise strongly, the market looks cheap and appears fully to discount the “choppy” recovery predicted by Mervyn King, who explicitly ruled out the likelihood of a double-dip recession. Industrial stocks, particularly those with strong exports, will continue to outperform. Other sectors likely to do well are beverages, telecoms, electronic and electrical equipment and utilities. Oils could stage a further recovery. So too could banks. We are holding faith with mining stocks as a play on emerging market growth. Gilts look expensive and commercial property unattractive. We still like corporate bonds.

Reproduced with permission from Miles Moseley of Balkerne Asset Management