The Edinburgh fund manager Colin McLean was featured in my book Money Makers and remains one of the most talented stockpickers I know. His UK Opportunities funds are high beta, and have recently therefore done very well. These are Colin’s latest views on the equity market, which has of course been remarkably strong over the last two weeks. I rmeian confident that it will end the year higher than it began, confounding those of a bearish disposition.
“Summer tends to be a quiet time for stockmarkets with low trading volumes. Many investors are on holiday and there is little real news from companies. But in some years the summer months have been far from boring. Unexpected economic news or currency trends can trigger sharp stockmarket moves. How should investors deal with this unusual period?
There are precedents that give good reason to distrust summer trading. July and August 2008 delivered a sharp rotation from resources into financials. This year’s surprise is a continuing strong recovery in commodity prices and in shares of economically sensitive businesses.
The initial catalyst for the rally was news of exceptionally strong trading in investment banks, but encouraging growth in China has also lifted oil and other commodity prices. Many oil and mining shares have still not fully retraced last year’s fall, but are moving strongly back into profit. Investors should not dismiss the more positive stockmarket mood, even though overall trading activity remains light.
Undoubtedly, the UK economic background remains weak, but the unprecedented injection of money into banks is starting to feed into mortgage lending. There is still a large gap between the level of bank deposits and loans needed, but there are other ways to correct this. An extension of existing arrangements for the Bank of England to assist banks in funding mortgages could give a further boost to the economy. And the fact that the UK is doing some things right is shown by the strong performance of the Pound this year. The UK is proving a more flexible and resilient economy than Germany – not what many economists were predicting twelve months ago.
Since May, there has been greater realism in shares, with signs that the early euphoria of March and April has given way to investor discrimination. Some defensive sectors like pharmaceuticals and tobacco are recovering from their previous underperformance, but utilities are continuing to disappoint. Deflation is proving a tough environment for water companies, and if this continues many sectors will see further dividend cuts.
This summer, the stockmarket may surprise. But investors should not just look ahead to next year’s earnings recovery, but also try to assess future dividend risks. There may be no safety in high yields. However, it is not too late to buy into shares of some major companies with sustainable growing dividends”.
Jonathan Davis 