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Sitting bull or running bear?

Matt Goodburn looks at whether we are approaching a market watershed

The FTSE 250 recently reached its highest- ever level at 10,107.9, the culmination of a three-year run that has seen it rise by 160 per cent.

Over the same period, the FTSE 100 index has recorded 85 per cent growth.

The last time the market was at these levels was inthe dotcom boom in March 2000 before the TMT crash. Since early 2003, the global markets have enjoyed almost uninterrupted growth, buoyed by booming commodities increased merger and acquisition activity and strong growth from emerging markets.

But last week, influential Fidelity fund manager Anthony Bolton turned slightly bearish, slapping a put option on 91m of FTSE 100 stocks as a hedge on the firm’s special values investment trust.

Fidelity said: “You can see the caution in Anthony’s mind. Maybe he is expecting a bit of a setback. There has been a prolonged bull market and he is expressing a degree of caution.”

Another note of caution has come from Merrill Lynch European quantitative strategist Khuram Chaudhry. He says: “The stockmarket has had a strong bull run, and, in our view, that is now toppy.”

Iimia chief investment officer Nick Greenwood says: “We are seeing vast amounts of liquidity pumping round the system. The surplus cash is driving up all classes of assets together.” He likens the market scenario as “like driving with your foot on the accelerator but with your finger hovering over the ejector seat button”.

He adds: “Compared with corporate bonds, equities still look reasonable value. The problem is something may happen which will drive liquidity out of the markets.”

Michael Both of IFA Michael Phillips says: “We have had a very good run from early 2003. There are a lot of people who could take profits and be happy but there is no indication yet that the market will fall back and I would not be inclined to take my money off the table just yet.”

He adds that the “dithering US market” may be a cause for nervousness but with the quieter summer months ahead he expects markets to remain relatively benign.

He feels the global political situation is not as bad as some are reading it and he is optimistic that the markets can avoid serious economic volatility for now.

“A bit of a correction would not be inappropriate at this point but nothing has happened with Iran yet,” he says. “May is traditionally the time for a pause. We will sit tight for now and wait for fund managers to return in late August and early September.”

New Star UK growth manager Stephen Whittaker believes there is little evidence to agree with commentators who suggest the market is approaching any kind of fall.

“The point they are missing is that the global economy is expanding and the markets are still benign. Around 90 per cent of UK-listed companies have beaten market expectations this year. I can see the market grinding on for several more years and rising by another 25 per cent.”

Whittaker feels the only variable that could change the current scenario is a rise in inflation but he adds: “Emerging markets are growing rapidly and the US economy is still behaving reasonably well. I expect to see some sideways movement through the summer but we should see the markets remain benign for some time.”

Morgan Stanley Quilter chief investment officer Duncan Gwyther says most of his clients are looking for returns over five to seven years and he believes the long-term outlook is still attractive for investors.

He says: “I would say that for the longer term investor, the bull run is not over but, on the shorter term perspec-tive, life is starting to getting more difficult because although energy costs are pressurising some high-profile companies at the moment, I cannot see the cost side getting out of control.

“No markets are horrendously overvalued at the moment so it is difficult to make the case for saying that investors should sell everything now and use the cash.

“The key message to investors is that they have done well out of equities recently and it could be a good time to change the balance of your portfolio and rebalance your risk profile.”

Bestinvest’s Justin Modray also believes the current economic climate is a good opportunity for investors to reassess the risk profile of their investments.

He says: “We are keen to give clients as wide a portfolio as possible to spread their risk and exposure. The last three years have been exceptionally strong and bonds and equities have both performed well, which is quite rare. For everything to continue as it has done over the next three years is unlikely.

“Companies are still cash-rich but we may soon start to see a slowdown in global growth and a rise in global interest rates, meaning that people could have less to invest, especially in the developing markets.”

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