News from the City - 16th October

The FTSE 100 Index has done exceptionally well since March this year.  Essentially there are three primary forces behind this.  

First there is the fact that prior to March the stock market had sold off heavily with fear driving markets well below what most analysts viewed to be ‘fair value’.  What was most widely sold in the six months up to the beginning of March is what’s been most widely bought since.  It is house builders and banks over utilities and telecoms stocks that have done well over recent months.

Secondly, stock markets are forward looking in nature.  Part of the price of any share is the forecasted future earnings.  With the huge stimulus packages announced by governments worldwide there is a growing consensus that the recovery is already underway (even if not always reflected in economic data) and markets are therefore re-pricing equities (stocks and shares) accordingly.

Finally, going into this recession companies have been particularly brutal in cutting costs.  While there have been firms that have gone bust, the remaining companies in any given sector are now likely to be running lower operating costs with an increased market share, which is naturally a very healthy position to be in.

It may be tempting to think that the FTSE 100 Index has got ahead of itself and is due a correction.  The challenge to this view is that there appears (at least anecdotally) to be plenty of investable cash around and institutional investors are still holding record cash balances.  Every time the stock market has corrected over recent months, investors have used it as an opportunity to buy into the market.

So for now the message appears to be enjoy the stock market while you can.

James Davies – Investment Research Manager

Source: BBC Online, Reuters