UK: Liquidity helps pricing levels
The UK market is witnessing a bull run, led by the large cap stocks, with valuations at an all time high, with healthy profits, good liquidity but with sterling's strength remaining a looming concern.
Eric McAuslan head of the UK equity department at Edinburgh-based Martin Currie highlights the completely unprecedented difference between the FTSE 100 and the FTSE Smallcap index a pattern reflected in the US and Europe as well.
He adds that investors are wary of the high 80s-style returns of the last three or four years. With the possible exception of Japan and the Far East, we have gone back to fantastic returns from equity markets worldwide.
"There is a possibility that the macro economic situation may have changed to a new low but steady growth, steady inflation era." he adds.
Liquidity is coming from high institutional cashflows plus building society windfall money some of which is going into unit trusts.
"What they generally go for is the big stocks with growing divergence throughout the year. It is even more marked within the top 100 stocks with the top ten or 15 stocks driving this market," he adds.
"Looking at the underlying fundamentals of the market, they are not bad. Yes there are some concerns about what sterling is doing, but company results and dividends despite some shocks are coming across well."
He adds: "Having said that, it is the FTSE itself which is above our target for the year end so we think that it is going to be difficult to generate decent returns from the year on in."
Richard Burns, head of the pension fund department and investment policy committee at Ballie Gifford largely agrees with this assessment: "We see the British equity market as a microcosm of the world." He ex-plains that currently concern centres on valuations which are high by past standards but this is supported by copious amounts of liquidity in the hands of investment institutions. He adds: "The fundamental position of the equity market is a little bit on the discouraging side but liquidity factors seem to have the upper hand over valuations."
McAuslan adds: "The reason why we are not taking the money out of the market, is that relative to other markets, the UK still lags."
Senior equity manager for Bank of Ireland Asset Management (BAIM), Leona Nicholson, describes the UK is a stock picker's market.
"We had seen a lot of good performances coming from a few stocks particularly financials. Other good performers include pharmaceutical companies such as GlaxoWelcome, SmithKlineBeecham, Zeneca, and in the oil sector Shell and BP," she says.
Lloyds - which is BAIM's and Ballie Gifford's biggest holding - has increased dividends by more than expected while indicating that excess capital may be used for acquisitions. Nicholson adds: "This, in addition to the Alliance & Leicester and Halifax floatations is keeping the whole sector bouyant."
Ballie Gifford has a neutral position in the UK mainly because of the pounds over-valuation but also strongly favours the banks. Burns adds: "Despite being on the upward part of the interest cycle, which has been unfavourable for banking shares, we don't expect as violent a cycle this time. We don't see base rates going above 8%."
However Nicholson adds: "I think you are going to see alot of people asking whether the share price is accurately reflecting the prospects."
Growth has come fromthe large cap stocks particularly the FTSE but Nicholson believes that the emphasis will increasingly be on value.
On the bond market, David Cavaye head of Martin Currie's bond division believes that the UK gilt market looks reasonably well supported. "We had quite a strong reaction to the granting of monetary independence to the Bank of England and since then they haven't moved much at all." He presents a modest inflation picture and expects gilt issuance to be modest too. "There is the likelihood of short rates making the curve ever more flat, possibly pushing the short end of the market higher than the long end but we don't see it causing the long end of the market to fall."
He continues: "The real yield on gilts compared with that for European bonds does look reasonably attractive. Sterling looks reasonably well supported so we have no strong view in terms of direction but see it as reasonably solid at these levels."