Market view
Overall it was another good month for the
markets. There are still some bears out there but the number
is diminishing as evidence mounts that the global economy
is picking up speed with the US as the driving force. A succession
of terrorist outrages caused a mid-month blip but investors
quickly shrugged off that threat. The FTSE 100 closed the
month up 1.28 per cent at a 14 month high of 4,342.6.
The one stock sector of Steel & Other
Metals was the best performer as Corus announced a fund-raising,
which was well received. Real Estate was spurred on by bid
action while Telecoms was ahead thanks to a very upbeat trading
statement from the heavily weighted, sector dominating stock,
Vodafone.
The weakest sectors - such as Automobiles
and Insurance – were hit by a good spattering of trading
statements reminding us that the picture of robust earnings
growth is far from universal.
The FTSE 250 actually lost ground. Since
it was Wall Street that was the dog and London the tail, it
is perhaps not surprising that it was the more liquid stocks
that felt the major uplift from the US advance. It closed
the month down by 0.21 per cent at 5,755.99.
The small caps benefited from a renewed private
client enthusiasm for equities.
Demonstrating a quite unbelievable willingness
to forgive the sins and failures of the bear market there
appears a real appetite for the risk of illiquid stocks and
– worse still – heavily loss-making illiquid stocks.
The FTSE AIM Index was the star performer in November, advancing
by 3.7 per cent to 817.14.
US leads the way
The economic data from the US now seems compelling. The American
economy is now growing at an annualised rate of more than
8 per cent and this is reflected in statements on earnings
guidance from US corporate, which, in recent weeks, have been
overwhelmingly upbeat.
Admittedly part of this growth is coming
from the weakness of the US dollar – so to suggest that
the UK can replicate America’s achievement is rather
over-ambitious. Moreover, the US economy has been stimulated
by a combination of very low base rates, significant tax cuts
and de-regulation of industry. In the UK our enlightened leadership
seem to think that increasing base rates, higher taxes to
fund a burgeoning public sector and tighter regulation of
commerce is somehow the key to economic prosperity. So thanks
to that fundamental naivety there is a second reason why UK
GDP growth (and hence corporate earnings growth) will lag
that of the US.
But the growth in the US is so dynamic that
it has to be exported here to a certain extent. Perhaps as
importantly it appears that American business confidence is
also being exported to the UK so having postponed many capital
projects (notably in IT) for many years, British finance directors
are now starting to sign cheques again.
If 2001 and 2002 were years of preserving
as much margin as possible via cost cutting, 2003 will perhaps
be seen as the year when – in its second half anyway
– volumes and sales started to increase.
Increased corporate earnings should feed
through to increasing share prices and it has been noticeable
how – in recent weeks - some noted market bears have
bought into this argument and turned bullish. On www.t1ps.com
my colleague Evil Knievil who is famed as a short-seller is
actually running a long book. City Index analyst Tom Hougaard
has been predicting the mother of all crashes for most of
the year but in late November he wrote:“I have gone
through 120 years worth of data and have found with 84 per
cent reliability that the market in the particular cycle we
are in right now should move higher. As a matter of fact,
it should move MUCH higher. This is a change of tune from
me, but I can't ignore the all-important time element here.
I have said on TV now for the last month that November is
a pivot month. What will happen from here will set the tone
for the next six months. Now I judge from the pricing action
and the COT reports in various markets that the US indices
could very well be on the verge of a huge move higher.”
Such a dramatic capitulation by the bears
would, a contrarian might argue, encourage one to think that
a crash is indeed on the way since with even bears now going
long there are no more buyers only sellers!
And indeed there are other reasons for caution.
At a sentiment level there has been more than a trickle of
somewhat speculative new issues, which appear to have been
happily oversubscribed. It appears that investors are again
countenancing the prospect of paying a premium for hope.
The fundamentals
At a fundamental level it is also clear that the recovery
in corporate earnings is far from universal. As I write, publisher
Reed has just served up a profits warning. It was not a horror
but it was a reminder that not everyone is enjoying a significant
uplift in earnings. Indeed with Christmas now almost upon
us there are very real concerns that at last the very high
levels of personal debt in the UK are forcing consumers to
think twice about opening their chequebooks. A number of high
profile profits warnings and stream of broker downgrades to
estimates suggest that the consumer spending bubble may be
about to burst. Or at least deflate.
And finally there is the issue of valuation.
The FTSE 100 now trades on an historic PE of more than 17.
Small caps are, in many cases, even more generously rated.
Such ratings demand an extreme uplift in earnings if they
are to be maintained. Now it is just about plausible that
such an uplift in earnings will come through, but to argue
that equities are fundamentally cheap earnings will actually
have to exceed even the predictions made by the bulls. With
some sectors of the economy still misfiring (consumer related
stocks or those industries where a weak dollar/strong pound
damages competitiveness) that may be a tough call. The FTSE
100 is 33 per cent up on its lows of March – arguably
the good news is now in the price. Certainly little in the
way of bad news has been discounted.
Tom Winnifrith edits the free to register
share tips and market reports service www.UK-Analyst.com
REFS is
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