Summer time means many indices now anticipating a tonic
WITH the good summer weather comes less focus on the stock market, and the summer doldrums usually mean a quiet time in the investment world as so many people are away on holiday.
This year has been a positive one for equities both in the UK and the US – the long bull market has continued despite high levels of political uncertainty and unpredictability. In broad terms, stock markets have been rising since 2009, seemingly unstoppable and giving rise to much speculation generally that we are heading for a correction.
As the latest US earnings season gets under way, the usual form is for markets to be pleasantly surprised by companies exceeding low expectations. So far this year the S&P 500 has risen more than 10 per cent, led by strong gains for technology and healthcare shares. Many indices reached a peak in June and now are anticipating a tonic from the latest set of earnings.
Unsurprisingly we have seen a renewed opinion expressed that stock markets are overvalued (particularly in developed markets) but there are several points to note.
Firstly, we are facing an unprecedented period of low interest rates – it is 10 years since the Bank of England raised the base rate. This limits the scope for real return for investors, with cash earning a negative real rate and government bonds distorted by quantitative easing and most conventional gilts showing a loss to redemption.
Where else can investors achieve a positive outcome, both in terms of income and capital growth? The options are certainly limited and many blue chip equities – most of which are household names – are still offering yields of over 5 per cent.
This, too, comes with a risk (apart from the inevitable price volatility) in the first quarter of 2017, some 56 per cent of main market dividends were concentrated in just five stocks: Royal Dutch Shell, AstraZeneca, BP, Vodafone and GlaxoSmithkline. In the three months to the end of June, £33.3 billion was paid out in dividends, the highest ever in a quarter and a rise of 14.5 per cent on last year.
There has been a great deal written about the political uncertainty as a result of the unpredictable President Trump, the advent of Brexit and the growing tide of general dissatisfaction with the political elite. It is a fact that investment markets, while obviously taking note of such developments are in reality far more influenced by economics than politics. Overall we are still seeing a reasonably positive global economic backdrop.
Another frequently expressed opinion recently has been the meteoric rise of technology stocks being unsustainable – an inevitable concern for those of us who experienced the end of the 1990s. In the US the tech sector has already risen by a fifth this year, but there are irrefutably massive success stories here and the tendency for investors to buy any new technology stock, however unproven is notably absent.
It is difficult to sum up where we are now. The market is certainly unforgiving if companies disappoint and more recently we have seen the UK market giving up some ground, but there are still opportunities, although in the short term these may be in companies less dependent on the UK economy.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.