Steve Ruffley on UK stocks and the FTSE 100's future
Global stock markets seem to be having a tough time giving up the idea that free money is finally coming to an end. The Fed and Janet Yellen have reverted to being a broken record and being ‘data-dependent’ in deciding when the projected rate hikes will hit the US. This state of perpetual limbo between data being the key and the ‘inevitability’ of it all has led to a sequence of dip-buying in the markets.
We have seen over recent years that a failure to close toward the lows in the S&P 500, FTSE 100 and DAX 30 has resulted in losses quickly being bought back up.
Currently however we are at some key technical and fundamental levels globally. The S&P is holding just above 2000, the FTSE just about 6000 and the DAX just below 10,000. You have to seriously think that once these levels finally act as resistance rather than support we have to see a global correction.
It’s not rocket science to understand why stocks remain higher. With little or no returns from banks, cash is pouring into stocks to get any type of return. What is worrying however is the lengths to which companies will go to attract investors. For me the FTSE is the market most at risk from overheating, for pretty obvious reasons. Firstly, companies in the FTSE are paying out over 70% in dividends – this is not a sustainable model. This leaves companies woefully undercapitalised and vulnerable to any major upsets, like the possibility of a Brexit.
Secondly, we’ve got UK interest rates. Mark Carney has said publicly that the UK is not experiencing a consumer-driven recovery. I find this fact hard to swallow. With rates looking like they will remain at historic lows for at least the rest of the year, and coincidentally one of the key ‘hike’ MPC members being recently replaced, I can’t see how the UK’s growth is not being substantially funded by personal debt and the addiction to low-cost borrowing.
History also suggests that every seven years or so there is some sort of correction in the markets. The UK’s QE attempts, in the form of the asset purchase facility, have been less aggressive than the US’s, and it seems like we are still playing catch-up. Where the US is looking to normalise the UK is still saying it can hold off rate hikes until maybe 2019 and also engage in a new round of asset purchases. This leads me to believe the worst is still to come and the question is not if we will see another credit crunch but rather just how bad will it be this time around.
I foresee the FTSE making a small recovery to 6500 when the Brexit vote is finally put to bed and we stay with the EU. People with loans, mortgages or paid-off houses will not want any kind of unknown. These are the people who vote, not the people in it for the glory of the outdated idea that Britain can once again be great. People will not want to see borrowing costs go up or house prices go down: this is what the government’s fear campaign is telling us will happen.
The UK in the short term remains damned if it does or damned if it doesn’t. Look at the Scottish referendum. After a no vote, Scotland has been shifted firmly to the back of the political queue. The UK faces a similar fate. A vote to stay means the EU can take their pound of flesh while a vote to leave means a free-for-all and guaranteed UK casualties. For this reason after the euphoria of staying in the EU any FTSE gains will be short-lived. I very much doubt we will see a return to 7000 – for the short period of time the FTSE was at those levels it never looked convincing.
I stick to my previous prediction and see the FTSE heading down to 5600/5500 levels towards the end of summer and, once the world wakes up to the fact that stocks have been propped up at unsuitable levels with previously untried polices, the writing will be on the wall. I see the FTSE potentially breaking below the 5000 mark and, although it may not stay there for long, the sell-off will be like nothing we have experienced before. We could easily see the FTSE range between 4000 and 5000 for a number of years when investors and central banks alike finally pull the plug.
Chief Market Strategist
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