Feeling more relaxed? Many investors, domestic and global, believe that the apparent newfound stability of the General Election result might unlock the potential of the home stock market, one of the world’s cheapest.
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Confidence is key, and investors are now more inclined to embrace what some believe is the cheapest market in the world, bringing it back from the wilderness, as one fund manager put it.
One fund group put it this way:
“Investors are now placing much of their faith in the character of the man; steady, predictable, and a little boring”.
Boring perhaps, but by the time of the Autumn Statement in November we still need more detail on a broad range of policy initiatives, and how these will be funded e.g. housing, health, technology, infrastructure, energy, education. The best way to pay for these is to encourage growth which will in turn generate a higher tax take. Without growth, and a bigger tax take, the alternative is crippling rises in tax rates, which will hit growth, and cause turmoil in stock and bond markets with a rising risk of recession.
There will be a big spotlight on how this Government will raise the growth rate of the economy.
According to another fund group:
“Historically, sizeable parliamentary majorities have coincided with periods of above-average economic growth. For UK equities, this victory could signal a long-awaited resurgence.”
Perhaps resurgence in markets in the short term. But it has to be followed through with action to boost growth at some point – a boring leader only gets the UK so far!
Another immediate boost for the UK stock market is that the new sense of political stability is in stark contrast to other Western countries. The US stock market is not just horribly expensive, but the November election is an obvious source of instability. More recently, some EU nations seem intent on stoking fires of instability e.g. France is becoming ungovernable, and the German economy is struggling, encouraging talk of it being the new “the sick man of Europe”.
Taking all of this together, it certainly makes “the worlds cheapest stock market” look attractive – the vast sums washing around the world have to go somewhere after all.
For example, in the week before the election, one investment house reported a net inflow of £276m, 20 times the amount in the week after the election was announced.
These are extracts from our modestly positive blog early this week, aided and abetted by some enthusiastic fund managers invested into the UK.
But there are dissenting voices. Gavekals old hand Anatole Kaletsky is one.
His point is that Labour has already irrevocably committed itself to the Conservative's spending and borrowing plans. This hard boundary means that the government simply cannot come up with the extra revenue to meet its policy promises. Anatole doesn’t believe this will happen before some economic or political crisis “within a year or two”.
At that point, instead of Conservative fiscal rules dressed up in Labour clothing, the onset of crisis will provide cover for a true break from the constraints inherited from the previous government.
It is certainly a plausible scenario.
But back to today, we can still enjoy the honeymoon for the new administration. The domestically oriented FTSE 250 is now up through 21000, and the last week has been positive. It is up 2.7%, compared to the FTSE 100 being down (by 0.2%), along with the main German and French indices.
The FTSE 250 now appears set for an assault on the prior peak, a little more than 15% ahead. Smaller companies should move in tandem, perhaps with a tad more gusto.
Our tools give you the wherewithal to identify the funds that can take you on that journey, particularly the Best Funds By Sector, and also the ready-made Dynamic UK Blend Portfolio. Since launch the latter has outperformed the FTSE 100 index by a multiple of 8! So be wary of the Guardians Of Mediocrity who proclaim that you should only buy index trackers – that approach loses you a fortune.
Similarly, be wary of lazy practitioners who tell you “the market always recovers”. It doesn’t, at least not in a timescale which is acceptable for your life stage. Use our unique Stop-Loss tool. For those who need a refresher, and new readers, do have another read of Adapt And Survive and “Stop-losses and Momentum Don’t Work”. Let’s Look At The Evidence.
There is one last immediate risk this week - over-enthusiasm and over-commitment leading to unforced errors, the sort you will observe from the losers at Wimbledon this weekend. If you have suddenly become very excited about opportunities in the UK stock market, the risk is that you over-commit and aren’t prepared for the possibility of being wrong. So do read this update of one of our classic blogs, “Avoiding Unforced Errors”.
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