Begbies Traynor (LON:BEG) today issues the quarterly "Red Flag" report, which is always worth a read, since it gives an unbiased overview of the levels of corporate financial distress, and hence outlook for the economy overall. Today's report for Q4 2012 is striking in that it's remarkably upbeat, suggesting that companies which have survived this far are now recovering. Although consumer facing sectors are still in difficulties.
As regards the Stock Market, most of us are wondering how long this bull market can continue for? On the one hand the rises feel too far too fast (where have I heard that phrase before?!), but on the other hand markets have overall just gone sideways for the last 15 years or so. With small caps I'm finding plenty of reasonably priced companies (on PERs in the 8-12 range), but not many absolute bargains (PER below 8, with little debt).
That said, if you start factoring in increased earnings from an economic recovery, then many shares could end up looking very good value now with hindsight in a couple of years' time. So I'm inclined to stick with what I've got, and am fully invested at the moment.
Furthermore, there is also the hot topic of discussion at the moment about Bond investors starting to switch into equities, given the ultra-low yields on Treasuries. Anyone holding long-dated Treasuries is out of their mind in my opinion - not only have they got an artificially inflated (by QE) asset, but it's yielding virtually nothing, indeed has a negative real yield, plus we are probably heading for higher inflation as the inevitable result of money printing. So they are sitting on something that yields about 2%, yet could easily see 30% wiped off its capital value through higher interest rates. Surely at some point holders of those Gilts will wake up and smell the coffee, and rotate into equities? Arguably they need to feel pain from Gilts falling in value first, before they switch into equities. Maybe that is now happening?
Interestingly, I'm also seeing people reappear who have been out of the equities markets for years, drawn back in by this bull market (3 years too late!). So I suspect equities might surprise on the upside, as fresh money bids up prices, driven by poor returns elsewhere.
