Stock market: is it time to take profits?

Stock market: is it time to take profits?

The FTSE100 is at a 16-month high leaving many people wondering whether they should take some profits and redirect their money elsewhere.

Published: 10:13PM GMT 10 Jan 2010

Stock markets across the globe have carried on where they left off in 2009 and continue to climb. The FTSE 100 index, for instance, reached a 16‑month high on Tuesday when it broke through the 5,500 level.

Since Britain's blue-chip index fell to a low of 3,512 in March last year, investors have seen a 60pc return on many of their investments. In some cases they will have seen even greater gains if they had invested in overseas funds.

The question now for many people is whether they should take some profits and redirect their money elsewhere. While stock market bulls say that shares will carry on rising, there are fears that the economy could falter again once the Bank of England puts the brakes on quantitative easing and interest rates start to climb.

The Institute of Directors (IoD) said business leaders were pessimistic about prospects for the British economy and warned that "a double-dip, or even a triple-tumble scenario" was a significant risk.

Graeme Leach, the IoD's chief economist, said: "We are very doubtful of a sharp bounce back in 2010. We don't believe sustainable growth will occur. Yes, there could be an occasional spurt of activity, but the next two years look pretty glum."

It is no surprise then that many investment professionals are taking profits and redirecting the gains into other investments.

Oliver Burns, a private client investment manager at Jupiter, is taking profits from some of last year's winners and rotating into higher yielding, larger-cap, defensive stocks.

He said: "We remain positive on the market while interest rates stay low and there are signs of economic recovery, but we believe it has overrun in the short term. In terms of sectors, we are reducing our exposure to corporate bonds, but remain positive on the long-term prospects for emerging markets.

"In our view, stock-picking funds will add significant value over the next year and so we are considering managers such as Derek Stuart, who runs Artemis Special Situations, and Ben Whitmore of Jupiter UK Special Situations, as well as higher yielding funds such as Schroder Income and Artemis Income."

Jonathan Jackson, an equity analyst at Killik & Co, the stockbroker, said: "We would certainly look at taking profits on certain shares that have done well, such as M&S, and reinvest elsewhere in the stock market."

Gary Potter, an investment manager at Thames River, the multi-manager specialist, is in the camp that thinks economic growth is going to struggle and suggests some of the recent rises in commodity stocks are due a pause.

"We have always encouraged people to take profits where they have done well and look to areas that have good outlooks but where share prices have been left behind. For example, mid and smaller-cap stocks have underperformed in this large-cap rally and may offer investors a better home."

But Adrian Shandley, the managing director of Premier Wealth Management, is not convinced that now is the time for investors to exit the stock market altogether. He believes that shares are still undervalued, despite their rise over the past nine months.

"Britain definitely has serious problems, but that doesn't mean the stock market will do badly," he said. "And it often rises after general elections, as they get uncertainty out of the way. Before then, I'd expect markets to be fairly flat."

However, he does believe that investors might want to rejig their portfolios because the recent market rises are likely to mean that they will have greater exposure to certain areas than they need. This could make their portfolios more risky than investors would like.

Broadly, you need to sell enough from sectors that have outperformed to bring your asset allocations back to their original percentages, he said.

For example, you might have split your money at the outset as follows: 30pc UK equities, 30pc bonds, 30pc international equities and bonds, 10pc property. The strong performance of the overseas markets would have boosted their proportion of the portfolio above 30pc, so you need to sell some of your holdings to return the percentage to 30pc.

Mr Shandley added: "Even if you decide not to reduce your exposure to shares, it's a virtual certainty that you should rebalance your portfolio. If emerging markets have stormed away and you remain fully invested in them, a crash will wipe out all your gains. Rebalancing would protect some of those gains."

T Bailey, the investment manager, is in the throes of reducing its exposure to the UK and giving its portfolios a more global feel.

But it is cautious about emerging markets in the short term and is therefore looking to invest in funds in the mature overseas markets such as America (its favoured funds are Axa Framlington American Growth, Neptune US Opportunities and Vanguard US Opportunities).

Philippa Gee of T Bailey said: "We recently reduced the allocation to Japan slightly in favour of the US, using the Legal & General US Index Trust. We also moved a small allocation from the Asia Pacific ex Japan sector to the UK. This went into the iShares FTSE 100 exchange-traded fund (ETF)."

Stephen Ford, an investment manager at Brewin Dolphin, the stockbroker, also said he was becoming more cautious on emerging markets in the short term, given the run they have had. "We have noted that emerging markets are now trading at a 15pc premium to developed markets and therefore a period of consolidation is probable.

"We expect 2010 to be a year for investors to take less equity risk than they carried in 2009 and that conditions will become more volatile. That said, equities should still outperform bonds over the next 12 months."

Whether now is a good time to take profits depends on when you originally invested your money, Mr Shandley pointed out. If, for example, you invested just before the banking crisis you are unlikely to have any profits to take. If you invested last spring or five years ago, on the other hand, then you will have profits to take.

Andrew Merricks of Skerritt Consultants, the Brighton-based independent financial adviser, said investors should think twice about taking profits on investments that produce a decent income, such as corporate and high-yield bonds, because such yields continue to offer a good alternative to the returns on cash and gilts.

Several experts believe that emerging markets – though still a decent long-term play – are favourites for a correction.

Mark Harris of Henderson said: "A number of higher-risk areas such as emerging markets have done extremely well from the lows in March 2009. It is worth taking profits from emerging markets and cyclical sectors such as mining, despite their long-term attractions.

"While we do not believe that the recovery will be derailed, asset pricing conditions are likely to change. For investors who are mindful of shorter-term moves in asset markets, it is worth considering switching some money away from the leading markets and sectors into the laggards."

http://www.telegraph.co.uk/finance/personalfinance/investing/6963591/Stock-market-is-it-time-to-take-profits.html