Does the ?hippo market?, when the index trades in a narrow range, mean investors should steer clear?
Fresh fears about the eurozone forced the FTSE 100 index of Britain's biggest companies down again this week to trade around 1,000 points lower than its peak level 11 years ago. After being stuck within a narrow range mostly below 6,000 for the past six months, investors are entitled to be disgruntled.
Some are beginning to ask if a City clique of hedge funds are selling into every rally, making it a waste of time and money to pursue tried and tested strategies of "buy and hold". Others question if there is anything investors can do to make money in a market that seems destined to trade sideways.
When it comes to stock market predictions, there are only two types of expert – those who don't know and those who don't know they don't know. So, bearing in mind these words of caution from Warren Buffett, Your Money asked a panel of seven unit and investment trust fund managers, who hold many billions of pounds of investors' money, how they would answer the cynics.
Conspiracy theories were played down by Andrew Bell, chief executive of the £980m Witan Investment Trust, who pointed instead to current events. He said: "The FTSE has been range trading since November because the flow of positive news from economic growth, earnings and dividends has been countered by worries about inflation, China acting to slow its growth rate, other emerging economies tightening monetary policy, oil price rises threatening to squelch growth, a never-ending death scene from the euro and, finally, another Icelandic volcano.
"I don't believe it reflects the ordinary investor being the mug while the City trades on the smart view of things. There is quite a split in the City between bulls and bears, so I think everyone is trying to invest and trade as applicable, according to their take on evolving events and their investment timetable.
"Personally, I am a watchful bull. Provided the recovery carries on without mishap, time is on the side of equity investors from these ratings."
One measure of value is the price/earnings ratio – or how many years' earnings per share would be needed to buy those shares today.
The FTSE 100 current price/earnings ratio is just over 11 times and the average yield – dividends expressed as a percentage of share prices – is 3.2pc net of tax. The index does not look expensive on either basis and buyers today may obtain bargains, suggested Jeremy Tigue, manager of the £1.8bn Foreign & Colonial Investment Trust.
He said: "The principal reason the FTSE 100 is going up and down so much within a limited range is the day-to-day conflict between the generally gloomy global macro data – for example, the Japanese earthquake, eurozone problems, concerns about a slowdown in China – and the generally positive micro data, such as companies reporting good results, dividends going up and takeover activity.
"Pretty much the same thing happened this time last year and the FTSE fell below 5,000 before the good corporate news helped unleash a rally back over 6,000. We think the present directionless period is more likely to end with another move up than down."
If that seems to bear little relation to the grim economic reality at street level in Britain, then one explanation may be that about two thirds of the revenue of FTSE stocks is now generated overseas.
Tom Dobell, manager of the £6.8bn M & G Recovery open-ended investment company (Oeic), explained: "We take comfort from the fact that many companies listed on the London Stock Exchange are truly global in nature. The UK is home to some world-class companies that are well placed to benefit from the long-term dynamics driving the world economy.
"We believe very strongly that focusing on the long-term prospects of individual companies, rather than second-guessing the short-term direction of markets, is the best way to create wealth for investors. We have confidence in the recovery approach and remain convinced that our strategy of backing the underdog will reward patient investors."
James Anderson, manager of the £1.8bn Scottish Mortgage investment trust, is another who believes the best hopes of economic growth are to be found overseas.
He said: "Our focus has been more of an international than a domestic one for a number of years now.
"Notable areas of interest include China where we see a number of leading, often domestically oriented, rapidly growing and innovative companies as having promising long-term prospects. We are also excited about the prospect in the wider technology-related sphere – we are seeing rapid advances in a number of areas including cloud computing but also health care, biotech, robotics, artificial intelligence and alternative energy."
But international exposure can prove a double-edged sword because commodities – including the biggest-ever London Stock Exchange float last month of Glencore – now comprise about a third of the index and have suffered sharp setbacks recently.
Jeff Hochman, a director of technical analysis at Fidelity International, said: "Global equity markets in general, and the FTSE in particular, have shown a high correlation with commodity prices over the past few years, as they are viewed as a good proxy for global growth, economic recovery prospects and hence earnings.
"The commodity bull market slowdown is itself a reflection of the gathering uncertainties that investors currently have towards future global growth prospects, and these uncertainties manifest themselves in trading ranges, as at present."
Job Curtis, fund manager of the £660m City of London Investment Trust, pointed out how this could make some funds more risky than investors expect: "At the end of last month, the oil sector was 19.4pc of the FTSE 100 and the mining sector was another 14.2pc.
"So these two sectors, where share prices are ultimately linked to volatile commodity prices, together account for one third of the FTSE 100. This accounts for some of the recent volatility in the index. It also highlights the dangers of investing in index-tracking funds."
Edward Bonham Carter, chief executive of Jupiter Asset Management – which has £24.5bn under management – agreed: "Index funds or 'closet trackers' are not necessarily a low-risk option. The hippo market, where indices wallow around doing very little over the long term with significant short-term bouts of volatility, is alive and kicking.
"The FTSE 100 was at these levels in 1998, so this hippo market has been going on for some time. Such conditions have prevailed for long periods in the past, such as in the US between 1966 and the early Eighties, and this hippo market has the potential to continue for longer than people may imagine." MondayPayment Register closed Ex-Div
Source http://www.telegraph.co.uk/
"Personally, I am a watchful bull. Provided the recovery carries on without mishap, time is on the side of equity investors from these ratings."
One measure of value is the price/earnings ratio – or how many years' earnings per share would be needed to buy those shares today.
The FTSE 100 current price/earnings ratio is just over 11 times and the average yield – dividends expressed as a percentage of share prices – is 3.2pc net of tax. The index does not look expensive on either basis and buyers today may obtain bargains, suggested Jeremy Tigue, manager of the £1.8bn Foreign & Colonial Investment Trust.
He said: "The principal reason the FTSE 100 is going up and down so much within a limited range is the day-to-day conflict between the generally gloomy global macro data – for example, the Japanese earthquake, eurozone problems, concerns about a slowdown in China – and the generally positive micro data, such as companies reporting good results, dividends going up and takeover activity.
"Pretty much the same thing happened this time last year and the FTSE fell below 5,000 before the good corporate news helped unleash a rally back over 6,000. We think the present directionless period is more likely to end with another move up than down."
If that seems to bear little relation to the grim economic reality at street level in Britain, then one explanation may be that about two thirds of the revenue of FTSE stocks is now generated overseas.
Tom Dobell, manager of the £6.8bn M & G Recovery open-ended investment company (Oeic), explained: "We take comfort from the fact that many companies listed on the London Stock Exchange are truly global in nature. The UK is home to some world-class companies that are well placed to benefit from the long-term dynamics driving the world economy.
"We believe very strongly that focusing on the long-term prospects of individual companies, rather than second-guessing the short-term direction of markets, is the best way to create wealth for investors. We have confidence in the recovery approach and remain convinced that our strategy of backing the underdog will reward patient investors."
James Anderson, manager of the £1.8bn Scottish Mortgage investment trust, is another who believes the best hopes of economic growth are to be found overseas.
He said: "Our focus has been more of an international than a domestic one for a number of years now.
"Notable areas of interest include China where we see a number of leading, often domestically oriented, rapidly growing and innovative companies as having promising long-term prospects. We are also excited about the prospect in the wider technology-related sphere – we are seeing rapid advances in a number of areas including cloud computing but also health care, biotech, robotics, artificial intelligence and alternative energy."
But international exposure can prove a double-edged sword because commodities – including the biggest-ever London Stock Exchange float last month of Glencore – now comprise about a third of the index and have suffered sharp setbacks recently.
Jeff Hochman, a director of technical analysis at Fidelity International, said: "Global equity markets in general, and the FTSE in particular, have shown a high correlation with commodity prices over the past few years, as they are viewed as a good proxy for global growth, economic recovery prospects and hence earnings.
"The commodity bull market slowdown is itself a reflection of the gathering uncertainties that investors currently have towards future global growth prospects, and these uncertainties manifest themselves in trading ranges, as at present."
Job Curtis, fund manager of the £660m City of London Investment Trust, pointed out how this could make some funds more risky than investors expect: "At the end of last month, the oil sector was 19.4pc of the FTSE 100 and the mining sector was another 14.2pc.
"So these two sectors, where share prices are ultimately linked to volatile commodity prices, together account for one third of the FTSE 100. This accounts for some of the recent volatility in the index. It also highlights the dangers of investing in index-tracking funds."
Edward Bonham Carter, chief executive of Jupiter Asset Management – which has £24.5bn under management – agreed: "Index funds or 'closet trackers' are not necessarily a low-risk option. The hippo market, where indices wallow around doing very little over the long term with significant short-term bouts of volatility, is alive and kicking.
"The FTSE 100 was at these levels in 1998, so this hippo market has been going on for some time. Such conditions have prevailed for long periods in the past, such as in the US between 1966 and the early Eighties, and this hippo market has the potential to continue for longer than people may imagine." MondayPayment Register closed Ex-Div
Source http://www.telegraph.co.uk/
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