F&C head of asset allocation Paul Niven says sentiment is showing obvious signs of improvement. He says: “In the UK, there has been an increasing expectation that growth will return later this year and perhaps in the third quarter. Indeed, positive surprises on the service sector PMI as well as a moderation in contraction in manufacturing have been the latest data points viewed as indicating that improvement is coming.”
Yet last week’s decision by the Bank of England to keep bank rate at its historic low is indicative that not everyone thinks life has changed that much – yet.
Charles Stanley chief economist Edward Menashy says: “If recessionary forces are decelerating and credit is becoming more available, then the prospect for rising interest rates has moved a step nearer.”
Even more bullish on the current market is European fund manager Stuart Mitchell of boutique SW Mitchell Capital. Speaking at the Harrington Cooper summer conference last week, he said: “Overall, I am pretty optimistic. I think March was the bottom and what we have been seeing is just the beginning.”
Menashy notes that recent economic statistics have been strong, raising the prospect that the recession may be about to end. He cited the Nationwide survey of consumer confidence hit a six-month high in May 2009 while the CBI has indicated that just 7 per cent of banks believe credit conditions would be tougher in the next few months, down from 36 per cent two months ago.
But not everyone is as optimistic that the UK’s economic life will resume its previous course. Simon Pryke, who analyses the banking sector at Newton, comments that while much has been talked of about banks in recent weeks, the sector’s problems have not gone away. He compares the levels of debt in Sweden and Japan’s system before those respective financial bubbles burst and notes that some 16 years later they are still a long way off their previous peaks. “This is the backdrop for banks. The debt mountain they have has not gone away. The issue of too much debt still looms large over the market,” he says.
Invesco Perpetual income manager Neil Woodford believes that it remains a difficult time in the UK – in the macroeconomic sense and also at the market level. Despite the rally, Woodford says he is sticking with businesses positioned to cope with what he believes will be some years to come of very difficult economic conditions. Businesses that are not overly exposed to the business cycle are well financed and have the capacity to deliver stable or growing profits, cashflows and dividends, he notes, adding that these are the same companies that investors have shunned since what he called the “cyclical rally” started in March.
He says: “I find myself feeling strangely back in the sort of environment that I was in nearly 10 years ago when I saw opportunity in stocks the market hated because they were old- economy stocks. Rolling on 10 years, I find we are in a similar, but for very different circumstances, sort of polarised market. The businesses where I see opportunity, where there are profoundly undervalued share prices, are the very businesses where I see the greatest upside.”
Woodford believes the current rally has further to go but cautions that it could be short-lived. He says the market is in the mood to look positively on almost every data point. “It is hard to know what might break the market’s confidence in that view, it is hard to know how long, therefore, this goes on for. I think it is important to sound a note of caution about that because whereas earlier in the year, when the market was at a very low level, I felt there was little downside in the market. Now 1,000 points higher and with most of that gain in the market having been concentrated in cyclical parts of the market, there is a lot being priced in.”
The recent rally aside, managers at Newton believe life has fundamentally changed following the bursting of the credit bubble. Newton’s absolute intrepid fund manager Iain Stewart (soon to be renamed real return) says the credit crisis has marked a secular change in the investing environment. The move from a leveraged world to one of thrift will be here for some time and investors need to adapt. “There is already more volatility in markets and that is likely to continue for some time. There will be lower levels of growth and asset prices, which will pose a problem for investors,” he says. Newton’s theme of “all change” is not just about the investing community but about the asset management firms as well. As an industry, the group believes there needs to be a move away from product towards the provision of service. CEO Helena Morrissey says there are many ramifications of the changes that the credit crisis has wrought, not least which is how money should be managed and invested.
Morrissey says: “It is very difficult to say with confidence what asset class will do best over the next three to five years. In looking for better returns, investors should look towards more flexible funds where managers can choose asset classes.”
Morrissey says she is not advocating a return to old-style balanced managed funds. Instead, she says she was referring to more multi-asset vehicles with absolute return targets.
Woodford says: “It is difficult to know what is going to happen next, it is difficult to make a judgment about where profits will be, where earnings, cashflows, dividends will be, so you have got to really think carefully about what you are doing.”
Whether the rally lasts or is simply indicative of needed relief from the seemingly endless months of bad news, one thing is certain – advising clients is going to be tricky in the weeks and months ahead. Exuberance is always nice to see but the industry has been here before.