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Brian Tora: Why are markets rising?

Brian Tora MM blog side

Last week saw me celebrating on air the rise of the FTSE 100 Index above 6,300 to reach the highest level attained since May 2008. True, we are still below the peak of December 1999 in price terms, though we are not far off moving into new high ground altogether on a total return basis.

The All Share Index is even closer to a new peak, but then the all time high was reached more recently – in May 2007.

The question the presenter of the programme to which I was contributing asked was ‘Why?’. Why was our market attracting investment support when economic activity was sluggish and the pound weak? Of course, the fall in sterling was part of the reason. You only have to look at the constituent companies in the Footsie to realise that they are far from dependent on either the UK’s economic performance or how the pound behaves.

But I was left with an underlying concern that perhaps investors might be throwing caution to the wind. Certainly, valuations are looking less compelling than last summer. Also interesting is the way in which indices tracking smaller companies are outperforming the heavyweight benchmark. It clearly demonstrates that an appetite for risk has returned.

But investment is not just about the UK – or even equities. Amongst the interesting items to cross my desk last week was a report that Goldman Sachs is positioning itself for a sell-off in the bond market. This coincided with a piece from a technical analyst suggesting that bond yields were about to rise. Agreement like this from two very different sources should be considered as something of a warning.

The Goldman Sachs stance is particularly revealing. It has acted in a similar way before, profiting from the implosion of the US mortgage market as house prices fell and sub-prime lenders went bust.

And it is moving at a time when all the signs are that a recovery in US house prices is at last underway. Not only are buyers finding conditions more competitive in some areas, but sales of white goods also appear to be improving.

There are also some encouraging signs on the residential property market here in the UK too.

Mortgage approvals are rising strongly, suggesting government initiatives are beginning to make a difference, while the Land Registry posted the largest rise in house prices in 2012 for three years. True, it was a rise of just 1.7 per cent – and it did contrast with modest falls posted by both the Halifax and Nationwide – but as a leading supermarket constantly reminds us, every little helps.

Not all the news coming out of the US has been as encouraging, with some indicators suggesting a more sluggish economic recovery than had been feared. But as one analyst’s note I read recently stated, austerity and zero growth do not have to persist indefinitely.

What is needed is something of a cultural change to reflect the demographic changes that will demand different approaches to government spending in the not too distant future.

My take on recent developments is that current indications are that the better tone to markets has some foundation in the news flow we are receiving, but that it would be wise to remember that markets do not move in a straight line, so some profit taking could ensue.

As for bonds, I have been concerned for some time that persistent higher than trend inflation could undermine this market, particularly in government issuance, but that this could turn out to be slower and later than expected. In other words, the future is as opaque as ever.

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


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