Introduction
It feels like we are swimming against the tide when we read the daily newspaper headlines predicting Armageddon for the UK stock market in 2008. The banking crisis is affecting both corporate and consumer borrowers, the high street is suffering and there is evidence of severe problems in the property market. It is in this environment of low morale that opportunities are missed.
UK
The performance of the FTSE 100 index has not, for the last six months, been an accurate reflection of the difficulties suffered by the majority of its constituents. Mining stocks were primarily responsible for holding the index up as companies in other sectors witnessed huge falls in their market capitalisations. This has presented some great opportunities to buy blue chip companies at historically low valuations.
The same can be said for the FTSE 250. There are many medium sized companies trading on attractive price to earnings multiples and with good dividend yields in the media, building and much beleaguered financial sector. However, the index for smaller companies, the Alternative Investment Market, had a difficult second half to the year - losing its impressive gains of the first six months – and we do not believe it will recover while investors continue to regard smaller companies as more high risk and volatile.
US
The US indices performed marginally better than those in the UK in 2007 and we think this trend will continue into 2008. Both the US and UK economies will suffer the repercussions of the credit crunch for some time but a lot of the fear and concern is already priced into the stock market with the result that valuations look quite appealing. Investing with the expectation that the Dollar will strengthen against Sterling we believe the US looks even more attractive.
Asia and Latin America
While the developed markets languish, the emerging markets are rejoicing in their new found wealth and success. The returns from many of these markets, particularly in Asia (with the exception of Japan) and Latin America, have been huge and we believe there is more to come.
Economic conditions and confidence among investors are better in the emerging markets than in the UK and US. Many Asian economies have current account surpluses, large foreign reserves and their export dependency on the developed economies is falling. We are concerned about and are keeping a careful eye on the durability of earnings but we do believe these markets will continue to produce good returns for the foreseeable future.
Conclusion
Over the last five years, global stock markets have been on an upward trajectory. However, they have been characterised by tremendous volatility and it is therefore easy to understand investor nervousness. If we can see through this we will perhaps be able to look back in a year or eighteen months time and recognise the excellent investment opportunities we are presented with today. Here’s to a happy and successful 2008.
31 December 2007
