The UK equity bull market, that started when QE was announced in March 2009, is now well over 6 years old which is a long time by historical standards. That makes some investors nervous about committing new funds to the market and others have gone as far as to liquidate existing positions and go into cash.
Even renowned hedge fund manager Crispin Odey has complained that ultra-loose monetary policy has caused some company valuations to be detached from reality and says “Once a bubble forms it has an internal logic of its own and it will grow until it has outgrown all of its surroundings.”
This is most obvious in the disparity between the returns of the FTSE 100 and the FTSE 250. In the past year the mid-cap index has risen 14.6% while the FTSE 100 has only increased by 1.5% and over the past seven years the 250 has outperformed the 100 by 50%. Whilst it is true that some of this has been driven by higher earnings for domestic companies, such as house builders, a large element has been the revaluation of earnings that has resulted in the smaller companies standing on higher multiples than the large ones.
In terms of price to book ratios the average for the FTSE 250 is 2.6 compared with 1.9 for the FTSE 100 index. The story is the same with price to sales, with 1.3 compared to 1.1, price to earnings, 18.3 compared to 16.5, and yield where 3.0% compares to 3.8%. On all measures the aggregate valuation measures of companies in the FTSE 250 is higher than for those in the FTSE 100.
Investors get little reassurance looking overseas as the future of Greece in the Eurozone looks increasingly problematic and the Chinese stock market is charging ahead.
Perhaps more damming is the observation from Societe Generale who say that in the last three years, the MSCI World Index has risen by 38% (11% per annum) whilst reported profits have risen by just 3% (that’s just 1% per annum!). It seems central bank actions–not profits–are driving equities forward.
Could problems there spill over into the UK?
So what to do, sit and wait for a correction or carry on investing?
History can help, and two things are clear.
Well after a crash is the best time to invest but we don't know when that will be. My theory is take some profits, sell off companies that are not performing or you no longer happy with then if you find a share that is good value tuck some away. Warren Buffet did not worry about what the market was doing. Problem for me I can't find much value at the moment but a few on my watchlist are becoming interesting. I agree about large companies v small, times of trouble large companies will do better, more reserves. Probably not the time to invest in companies with a lot of debt. I have read some of Crispin Odey comments which are worrying and he was right last time but then looking at his investments in Tung and Plus500 I not sure about him.
