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Have UK markets reached their peak?


Since the nadir of the financial crisis markets have been nigh-on irrepressible with investors enjoying huge gains. But fears are rising that the rug is about to be pulled from under their feet.

The environment of ultra-low interest rates and quantitative easing has helped global equities soar since markets bottomed out in March 2009 and those who were brave enough at the time to jump in, have reaped the rewards.

Since then to 10 August 2015, the MSCI AC World index has increased by 140 per cent, the UK’s benchmark FTSE 100 index has risen by 129 per cent while the US’s S&P 500 has rocketed by 186 per cent, according to FE Analytics.

But the loose monetary policy on offer from many of the developed world’s central banks has pushed bond yields down to historic lows, forcing yield-hungry bond investors and previously investment-shy savers into equity markets in a bid to boost their income, which in turn has driven up prices.

Back in June 2010 there was £488bn in funds under management, according to the Investment Association. Fast-forward five years and this tally has swelled by 77 per cent to £863bn.

Given the current backdrop, both advisers and fund managers now generally concur that the good days cannot carry on in the same manner.

Notably some cracks, albeit not disastrous, are beginning to show. The National Institute of Economic and Social Research (NIESR) cut its 2015 global economic growth forecast to 3 per cent, down from the 3.2 per cent it expected just back in May. However its prediction for the UK remained unaltered at 2.5 per cent.

The think-tank highlighted the economic woes in Greece and its huge levels of debt as a key risk. But while Greece has now agreed a deal with its creditors, there is no shortage of other economic factors to threaten the market’s enthusiasm. The European Union referendum, tighter monetary policy both in the UK and the US, a presidential election in the world’s largest economy next year are just a few.

GMO’s Jeremy Grantham, founder and chief investment strategist at the Boston-based asset manager, recently voiced his concerns in an interview with the Financial Times, saying that markets are “ripe for major decline”.

Grantham, who previously predicted the turn-of the century’s dotcom crash and the more recent crisis, asserted that while he expects the market to climb in the short term, he anticipates a derailment around the time of the US election. The fall-out could be a very different beast altogether too, he noted, given the level of government indebtedness.

Whether a crash comes or not, Henderson Global Growth fund manager Ian Warmerdam believes that after six years of market recovery driven by coordinated and repeated bouts of QE, equities have arrived “at a very interesting point in the road”, adding that it is “difficult to argue that, overall, valuations in equity markets are not now becoming somewhat stretched relative to historic levels”.

JPM Multi-Asset Macro fund manager Talib Sheikh says he is not overly bearish on the outlook, although he admits “some technical aspects of the markets today do look worrisome”. He says: “Whilst taking the maximum amount of risk has worked well for the last five years, we do not think it is going to work quite so well for the next five.”

But while the general consensus has been that US equities look on the expensive side, the UK market is offering a little more value given its rally has been, in relative terms at least, more muted recently. For example in the past 12 months, while the US market has achieved a total return of just shy of 20 per cent, the FTSE 100 has only edged ahead by 6 per cent.

Informed Choice managing director Martin Bamford however believes that UK markets are in a really tricky position for investors right now.

“A sustained economic recovery is likely to mean a rate rise, which could depress the equity and bond markets. After years of decent returns from both asset classes, the downside risk is becoming greater than remaining potential for upside,” he says.

OCM Wealth Management founder Jason Stather-Lodge agrees volatility may rise and the pace of gains is unlikely to match what investors have seen in recent years but he says gains can still be made.

“Investors would do well to hold overweight positions in equities especially in Europe, Japan and India, staying clear of government bonds in the US and UK in an environment of potentially rising interest rates in those regions,” he says.

Bamford adds: “If a significant equity market downturn does occur, which is a distinct possibility but by no means certain, then diversification in the form of bond and property holdings, would be wise.”

For investors who may be especially nervous, Rowley Turton chartered financial planner Scott Gallacher highlights the positive impact of low inflation: “If it stays low then the real return from cash is actually positive at the moment; consequently sitting out of the markets is not necessarily a bad idea.”



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