Scotland is a country that knows all about irony. The best-selling newspaper here is The Sun, which is a bit of a laugh when you think about it. So we should be well prepared when stockmarkets throw one of their periodic hissy fits and behave in a manner that is quite difficult to fathom.
Lately, the stocks in the UK that have been performing best of all are those which one might charitably call “of dubious quality”. The reasoning behind this is that they had been so badly de-rated as a result of their (sometimes colossal) debt and poor prospects it appeared they were heading for the market equivalent of the knacker’s yard. Then lo and behold, they managed to somehow survive and their price performance picked up.
I have nothing in particular against this except for the fact that stocks that were in much better financial shape, exhibiting good cashflow and earnings’ growth prospects, were left a long way behind. If one was running a quality portfolio, your relative performance suffered.
There is little use crying over spilt milk – we are where we are. The big question is, what happens next?
The market is a discounting mechanism and tends to anticipate events and price in the future. When one holds stocks which have very visible sources of growth over the next few years, with strong order books and security of contracts, then it seems only reasonable that the market will respond positively to these stocks in due course.
We are indeed anticipating this and believe that the next exploitable trend in the market will see companies such as these put in strong performances.
Crystal ball gazing has never been my strong point but there are a couple of things we know for sure about the near future.
The first is that, economically speaking, the UK is in a bit of a pickle. The second thing is that there will be a general election next year. One does not need the brains of Warren Buffett to know that whoever wins the election has a very big problem balancing the books.
Taxes will go up and serious cuts will be made to public spending. It remains to be seen what effect this will have on consumer spending and confidence, unemployment, interest rates and the stockmarket.
It may be that these headwinds turn out to be just that and merely slow any nascent recovery or it could be that they cause another dip in the stockmarket.
If the market is to continue its rise or if it will suffer another fall, we can be pretty sure that the stocks that perform best under either of these scenarios will not be the same. It is entirely possible to envisage a situation where the poorer stocks in the market end up propping up the indices yet again, perhaps in the second part of next year, perhaps even into 2011.
As things stand, I have no clue as to how the market will pan out over the next nine to 18 months. It is simply too difficult to call at present. Mark Twain said that October is a particularly difficult month for the stockmarket. The others are February, April, March, December and November. Also January, September, May, July, June and August. It’s no wonder we take the odd shandy. Perhaps up here that would be Irn(y) Bru.
David Clark is manager of the Ignis UK smaller companies fund