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Investment view

There is suddenly optimism about the outlook for equities but it is based on a thin foundation.

I cannot say that the information crossing my desk over recent weeks has been wholly cheering, yet the FTSE 100 index went above the 4,800 level last week. There is clearly a more optimistic tone among investors despite the fact that economic activity appears to be slowing all around the world.I have been puzzling over why this divide between economic experience and market behaviour is developing.

We have had the uncertainty over who runs the world’s last remaining super-power removed but the fact is that none of the problems that are inherent in the US look like being solved. Where is all this optimism on shares stemming from?It could be said that the UK stockmarket is just playing catch-up. Our headline index has been one of the slowest to recover from the ravages of the bear market. The US stock market turned in the autumn of 2002 but it took the commencement of hostilities in the Gulf, four months later, to turn our own index around and it became comprehensively bogged down just over 4,000 for the best part of a year.

Now, though, we are looking at a market that has risen not far short of 50 per cent from the bottom reached when the bear market finally drew to a close. For domestic investors, November has provided the bulk of the gains this year. I do wonder what it is that other investors are seeing that I have failed to spot?There could be an element of momentum behind this recent strength. Investors were getting bored. The sideways market had damaged confidence and was making life difficult for market operators.

Once things started to improve, there will have been many who were afraid they would be left behind. Remember, it was only a few weeks ago that we learned there had been a net outflow of cash from Isas for the first time. Private investors are usually the last to vote with their feet – and usually get it wrong. It all goes to show how thin the market can be and how even small buying can drive shares higher.

This is just the sort of situation where you need to look at the real data as it emerges. At home, it appears as if our economy is operating close to capacity. This, coupled with the likelihood that these better times will translate into higher bonuses in financial services and provide upward pressure on earnings, could mean that interest rates may not yet have peaked. It is the belief this leg of interest rate cycle may have come to an end that has been helping buoy shares.

In America, unemployment data suggests the economy is not making the progress that many had hoped. A worsening employment situation could impinge upon consumer attitudes – and it has been the consumer that has been driving US economic growth.

In Europe, there is every sign that the tentative shoots of growth have withered in the ground and that, at best, the major economies are stagnating. The strength of the euro will not be helping.

What should we be doing with our portfolios? This is the sort of situation that should make investors and advisers look more critically at what they hold. Weed out weaker stocks and funds. Carry out those sales you have been putting off until better times. And if you are reinvesting, think carefully about what you should be buying.


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