Investors Look Unlikely to Push the Stock Market

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Investors Look Unlikely to Push the Stock Market

Investors Look Unlikely to Push the Stock Market



With US markets sitting comfortably in the middle of the trading range of the last four/five months, it's difficult to see investors pushing for too much before the New Year.

Having said that, the usual early January rally, where money sometimes seems to pour in over the first week or so, might attract some buyers.

In contrast with the American stocks, the FTSE is bumbling along just beneath its 2011/12 pinnacle, on whose treacherous slopes many bulls have failed in their now multiple attempts to conquer the peaks.

Financial Spreads' clients have once again decided that discretion is the better part of valour and, as with every other move above 5875, have decided to sell heavily.

So far, we have had seven or eight moves above this mark in 2012, let alone 2011, and for many clients it seems to have been quite lucrative to oppose such bullishness. Although the same could also be said for those opposing too bearish an attitude as well.

On the other hand, the German DAX, which is still at the centre of the ongoing European crisis, is now at multi-year highs, trading only 400/500 points off the pre-crisis highs.

With debt likely to remain the 'Elephant in the Room' over the next four/five years, any conversation about rate hikes is likely to be very short.

The December 2014 3-month Short Sterling futures market, i.e. the base rate in two years time, still shows expectations for interest rates to be at 0.5%.

Even the longest date delivery, December 2015, is only pointing towards a rate of 1%, and this is probably more of a risk premium than anything else.

This leaves investors in something of a quandary about where to go for some kind of 'living' return.

Bonds have seen a stupendous rally over the last few years for many different reasons, but have been heavily influenced by Central Bank QE across the globe.

With 10-year UK Gilts now well below 2%, and with long-term inflation stuck above 2%, any Gilt buyers are almost guaranteeing a weakening capital position over the lifetime of the investment.

Holders of shorter-term assets are doing even worse. Investment rules announced over the last decade have forced an ever increasing selection of insurance/life/pension funds to invest in government securities, which is one of the reasons for the continued poor performance of such assets.

As such, we are hearing of increasing numbers of investors/SIPPs deciding to go it alone and invest for themselves, opting out of formal investment arrangements.

If this becomes more prevalent then we might, finally, see more of a return to the index markets in the coming years.

For all of the lack of direction over the last ten/twelve years, UK equities have paid out an average of 4% a year in dividend distribution, and this includes the banking stocks.

Eventually, equities may return to the sun, but probably not today.

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By Simon Denham, 17 December 2012


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