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Brian Tora: FTSE nudges upwards but market sentiment remains cool

As signs of economic recovery continue, quality is the word on managers’ lips 

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The FTSE 100’s flirtation with 6,800 is a sign that markets are still in good heart. Not that much of positive note seems to have grabbed investors’ attention.

Indeed, unemployment numbers appeared to edge up (the figures were more than a little confusing), making one wonder why Bank of England governor Mark Carney felt it necessary to change the rules on forward guidance. Still, the signs that the economy is improving nicely in good time for the general election next year have yet to dissipate.

So what changes to portfolio asset allocation look appropriate as we nudge our way towards a world of higher interest rates, less central bank intervention and slowing emerging markets?

Quality is the word on many investment managers’ lips these days. With mid- and small-cap companies having made the running for a little while now, perhaps all they are suggesting is that the large-cap stocks have ground to make up. That is certainly a thought.

It is what many US investment managers are saying, for much the same reason as their UK counterparts. The nifty fifty – Wall Street’s largest companies – have been left behind in the surge that has taken US markets to new high ground, so perhaps there is scope for catch-up. The US economic recovery is also further advanced than our own, though, like the UK, the country is considered to be too dependent on consumer spending.

Some other negatives are building. Signs of a slowdown in China are becoming more evident, while several profit warnings from leading companies suggest certain sections of the corporate world are finding the going tougher. As valuation ratings are not too demanding (though they are far from cheap), none of this need necessarily give investors cause for concern.

Technical analysts tend to be more black-and-white in their assessments, though. A colleague of mine who follows charts pointed recently to the strange dichotomy that has been developing in our benchmark index.

Apparently, while the past three highs in the FTSE 100 Share index have all been higher – a positive chart signal – the most recent three lows have all been lower, sending an altogether different message. This colleague also pointed to the possibility of two moving averages crossing each other on the way down, which many chartists would consider worrying.   

Candidly, I believe charts are of most use in telling you what has gone before, rather than in predicting the likely direction of markets, but I am conscious that they do have a following, so studying what they might tell us makes some sense.

At the very least, the combination of negative technical signals and worrying news on the corporate and economic fronts might lead some managers to sit on any cash they might have for future equity investment.

This leads me to the conclusion that we are most likely to be in what I can only describe as neutral territory for equity markets, such as here and the US. Investors may have to be prepared to sell if the upward momentum is regained properly, or buy should a significant setback occur. Both actions are likely to feel uncomfortable at the time but it is by betting against the crowd at times like these that success is most likely to be achieved.

Unfortunately, of course, no bell rings at the bottom or top of a market cycle, so those undertaking such counter-intuitive action may find themselves selling too early or seeing prices fall further after they buy.

All this assumes that no upsets take place on the geo-political front – not an easy call to make with the disturbing pictures coming out of Ukraine and no progress being achieved on the Syria front. 

For the time being, though, I plan to sit on my hands. I suspect many investment managers are already doing the same.

Brian Tora is an associate with investment managers JM Finn & Co

 

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