FTSE @ 6,700.

20th May 2013

Ian Copelin, Investment Director, my wealth comments “While ‘sell in May’ is an old stock market adage that gets plenty of attention every year, it doesn’t often make a profitable market-timing strategy.

This year is no exception.  If you had sold, you would have missed out on the plenty of positive momentum as equities have rebounded to their pre-financial crisis levels, amid signs the global economy is slowly improving.  The Dow Jones index has climbed above 15,000 for the first time; the S&P 500 is at an all-time high; and with the FTSE-100 up over 4% this month (and nearly 14% this year), it is back above the 6,700 level for the first time since October 2007 and is within spitting distance of its all-time high.

The global financial crisis which started in 2007 caused investors to put their savings into perceived safe-haven of government bonds (such as UK gilts).  The Eurozone crisis and last year’s US debt ceiling debacle merely compounded the unrealistically negative scenarios priced into equity markets as equities became the orphan asset.

The result was one of the biggest relative de-ratings in the gilt/equity comparisons.  But with low interest rates here to stay for the foreseeable future, bond yields are today well below 2% and well below the dividend yield an investor can earn from equity markets.  As a result, equities have become exceptionally cheap relative to government bonds.

While the prospects for UK growth look anaemic (don’t worry:  the relationship between annual equity returns and economic growth is very tenuous), globally economic growth is on a positive trend (albeit slightly unsteady) and with many of the factors which have been plaguing and politicising market sentiment over recent years are now finally being addressed, we expect global equity markets will continue to perform positively as equity valuations are still not demanding despite this year’s rally.

This coupled with the low expectations for corporate profitability growth suggest the risks are on the upside as any good news, such as the recent US employment growth and consumer confidence surveys, should continue to have a positive impact on the market, as consumers make up around 70% of the US economy.”