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Brian Tora: Mixed signals mean it’s a stockpicker’s market

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Last week saw an important anniversary. It was five years since the Bank of England lowered interest rates to 0.5 per cent in an effort to reverse the economic decline brought about by the financial crisis.

The Monetary Policy Committee held its monthly meeting last week as well. The minutes had not been published as I write, but there were no signs last week that the stance taken five years ago was about to be changed.

We also saw the FTSE 100 index surge to within 2 per cent of its all time high. With such a slim margin to overcome, perhaps it has already moved into new high ground. Certainly, most forecasters seem to be expecting it. And all this was achieved against a background of uncertainty and tension over the future for Ukraine.

As with the index, the time lag between me writing and you reading could mean events have moved on here as well.

The quarterly revision of the FTSE indices also took place last week. The changes will not actually come into force until next week, but at least we know which companies are in and which out. A last-minute surge saw St James’s Place shoulder one of the builders aside to enter the 100 share index. Had I been asked if St James’s Place would have been one of the RDR winners ahead of the changes to our regulatory framework, I probably would have said no, but they clearly have been.

As if all these anniversaries and events were not enough for a single week, we also learned that China was sticking to its 7.5 per cent growth target for the year ahead, doubtless to the relief of emerging market watchers.

All in all a busy time for those of us in the investment world and a reminder that the influences on the direction of markets are considerable in number and varied in effect – and quite often pull in different directions.

What is consistent in market behaviour is momentum. Markets always overreact, regardless of the direction in which they are travelling.

With most major markets (Japan excepted) already posting new highs and the smaller cap indices in the UK also having passed previous peaks, it seems reasonable to expect the Footsie to follow suit. And if it does, the expectation must be that it will push on higher, with momentum driving it forward.

But, as I said last week, our benchmark index is not necessarily a reliable indicator of what is going on in the UK market. For momentum, we need a more positive outlook for resource stocks, given their importance in this index.

Perhaps the news from China will help, but it is hard to see a major shift in sentiment taking place now. Also, we must hope the various geo-political influences do not frighten the horses.

The underlying trend does appear to be positive, though – perhaps reflecting a belief that global economic activity will continue to build. What does seem evident is that we remain in a stockpickers’ market.

In runaway bull markets, even mediocre managers can fool themselves into believing they have real talent. Difficult conditions will surely sort the sheep out from the goats.

It is not far off a quarter of a century since I first shared my thoughts on the investment scene with the readers of Money Marketing. This period has encompassed significant change, including the overturning of one modern myth – that equities deserve to yield less than government bonds because of their ability to raise dividend payouts.

I have little doubt that further change lies just around the corner but for now I am happy to sit back and await a new high for the Footsie.

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

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