As the global economy continues to struggle against a particularly severe recession,
equity markets seem completely oblivious.
Latest official data on the UK economy shows that both manufacturing and services output are falling at a rate not seen since the 1970s.
Add to this the soaring unemployment figures and the unknown impact of the swine flu pandemic, and its easy to see why so many
investors are feeling gloomy.
Yet since early March, the equity markets have surged 20% in a seven week rally that shows no sign of ending.
Talk of a new bull
This remarkable run has left fund managers frantically trying to decide whether this is merely a bear market rally set to run out of steam and plummet, or whether we're witnessing the start of a new bull market.
Only time will tell, but Royal London Asset Management (RLAM) believes the rally has already tempted investors into shifting some of their money into riskier
stocks.
“I believe this is an attractive time to increase exposure to risk assets by buying equities,” says RLAM equities head Jane Coffey.
“However, I still think that the best value opportunities lie in the more defensive growth stocks which are unusually trading at below market earnings multiples and offer above market yields despite the relative certainty of their earnings delivery compared with the financial and cyclical sectors.”
Equities attractive by comparison
One of the main things going for
equities is the lack of attractive alternatives.
Those holding cash have been blighted by plummeting interest rates (most savings accounts now pay less than 1% - before tax), gilt yields are near record lows and residential property rental yields still do not cover gross expenses despite falling mortgage rates.
“By contrast the FTSE 100, even with big cuts in dividends from the banks and other cyclical companies, is currently offering a 5% dividend yield,” says Coffey.
“Moreover, the big dividend payers are the more defensive sectors such as integrated oil companies, Tobacco, Pharmaceuticals, Telecoms and Utility companies - the very
stocks that are underperforming the rally.”
