Stock market: 'Eventually shares will have the mother of all rallies'
The stock market has jumped by about 500 points in the past couple of weeks, but investors thinking of putting their Isa money into shares want to know one thing:
is this the start of a sustained recovery or a dead cat bounce?
By Richard Evans
Last Updated: 1:06PM BST 02 Apr 2009
Stock markets have shown signs of life in the past few weeks. Since London's benchmark FTSE100 touched a six-year low earlier this month, falling below 3,500 at one stage, it has rallied strongly, closing at 3,912 on Tuesday.
America's Dow Jones index has also put in a good performance, posting one of its largest ever one-day rises following the announcement of a bail-out for banks' toxic assets.
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But British investors wondering whether to use this year's Isa allowance before the deadline of April 5 have reason to be cautious: the markets have staged several apparent recoveries during the economic crisis, only to fall back again.
So is it different this time – is this a long-term recovery or just a dead cat bounce? Should you forget taking out a stocks and shares Isa this year, or dip a toe in the market? We asked the experts where they thought the market was heading and which equity investments, if any, Isa buyers should consider buying.
MARK HARRIS, FUND OF FUNDS MANAGER AT NEW STAR"The direct answer is that there is no way of knowing for sure whether the recent rallies are a blip or something more sustainable, but in my view the March lows were significant.
"In early March we saw markets deeply oversold and widespread investor pessimism. Conditions were ripe for a bounce. Interestingly, a number of markets such as Brazil and China did not make new lows – they did not fall below their levels of November 2008.
"We have seen a marked increase in the determination of the US Federal Reserve to combat the various issues plaguing the financial system. This has resulted in a 20pc-plus bounce in most equity markets, which is the extent of the rallies in 2008 to January 2009.
"Valuations are supportive at lower index levels, but we have little visibility on earnings. In fact the earnings season through April is likely to be extremely difficult and may result in the markets retracing some of this rally's gains.
"I think the lows in March may prove to be significant, but that a 'test' may occur in April. If we can make a higher low for equities in April, it will be positive for further gains. But I should reiterate that I still believe that we are in a very challenging environment, and that it will be a couple of years before we can say that this bear market is truly over.
"So, put simply, we will see the rally which is just unfolding, then a correction of about 15pc, and then a further rally to take the market up in total by about 40pc from the lows."
JUSTIN URQUHART STEWART OF SEVEN INVESTMENT MANAGEMENT
"Shares on a five-year view may be OK, although prices could be highly erratic.
"I think it's too risky putting all my money into one asset class so
I've diversified my investments into a mix of commodities, property, international shares and fixed interest securities such as bonds.
"You can do this yourself in a self-select Isa but it could be expensive and time consuming. An easier way is to buy a multi-asset fund, which you can hold within an Isa.
"Multi-asset funds can be actively or passively managed. I favour the passive type because costs – which can make a big difference over 10 years – are lower. Active funds can have total expense ratios of 2pc.
"Passive funds track the performance of the various asset types using exchange traded funds (ETFs). Examples include Seven's own and products from Evercore Pan Asset.
"Among the managers to offer active funds are Jupiter, Merlin, Seven, Midas, Credit Suisse, M&G, Fidelity and Jupiter. Fidelity's Wealthbuilder has a good record while Jupiter's fund is higher risk but well managed."
MARK DAMPIER, HEAD OF RESEARCH, HARGREAVES LANSDOWN
"Come what may, do buy an Isa – use your whole allowance (£7,200, of which £3,600 can be cash).
"Unless you trust politicians – and I don't – they are going to try to get more money out of you by raising taxes. So shelter as much as possible from tax while you can.
"Some people think the Isa allowance is so small that it's not worth bothering. But the yearly sums accumulate: a couple who had used their full allowances for every year that Isas and their predecessors, Peps and Tessas, have existed could have built up £190,000 by now – and that's discounting investment growth.
"If you are nervous about the markets you can keep your money in cash, even in a stocks and shares Isa (although without the tax breaks), to drip feed into the market. This prevents you from putting it all in just before a fall.
"I suspect this rally is more of a dead cat bounce; it comes from a very low position. There seems to be a base at about 3,500.
Let's be a bit careful but with the market about 50pc below its peak it has to be an interesting time to think about investing.
"I don't believe, as some do, that corporate bonds are a bubble. If you buy through a fund such as M&G Strategic, Jupiter or Investec Sterling Bond, you will get a yield of 5pc to 6pc. If equity markets do eventually improve, bonds will have risen first.
"If you do want to buy equities, I would always go for a fund manager with a long-term track record such as Neil Woodford of Invesco Perpetual. But at the other end of the spectrum I also back emerging market funds such as Aberdeen's – that's where real long-term growth will be found, although prices will be volatile.
"With inflation of over 3pc on the CPI you would normally have interest rates at 5pc, not 0.5pc. So given the risk of inflation taking off I'd consider gold, via a fund such as BlackRock Gold & General.
"This rally is still more hope than anything else, the kind that has a habit of disappointing. I wouldn't push a load of money in; I'd wait for bad days and drip-feed it in then. The markets are not about to race away but one of these days they will, so don't wait for ever.
"Eventually, there will be the mother of all rallies."
ANDREW WILSON, HEAD OF INVESTMENTS AT TOWRY LAW
"All investors should aim to hold a diversified investment portfolio incorporating a wide range of different asset classes. The actual blend of assets should be determined by their objectives and attitude to risk."Given how far markets have fallen over the last year, it might make sense for some people to top up their equity exposure. This has the added benefit of averaging down on the 'book cost' of their shares, and at a time when valuations appear quite attractive over any sensible time horizon.
"However, it is not appropriate to add equity exposure to an already predominantly equity based portfolio. In this case one might consider other assets such as high quality corporate bonds or commercial property instead.
"The MSCI World index bottomed on the March 6 and we have seen a significant rally since then. What is fascinating is that absolutely nobody called it in advance and in fact none of the so-called experts have subsequently described it as anything other than a 'dead cat bounce'.
"We may not know for some time as to whether it actually was the bottom. There was certainly a washout of private investors in the week running up to March 6, with an extraordinary $30bn being sold out of US equity mutual funds, which is the kind of capitulation that can mark market lows."
JEREMY BATSTONE-CARR, CHARLES STANLEY"I'm not convinced that the recent rally is the real thing. Plenty of imponderables remain regarding the latest TARP extension [US toxic assets bail-out]. Also, we're closing in on the end of the quarter so some window dressing from deeply oversold levels also taking place.
"Essentially, the blizzard of daily macroeconomic data releases will gradually tell us when we're past the worst and things are convincingly less bad.
We suspect that that time will be confirmed in the second quarter and investors will start to buy risk assets again as the trough in corporate earnings becomes more clearly visible (probably in the final quarter of 2009 or the first quarter of 2010).
"The history of previous earnings recessions is that investors typically buy equities about six months from the trough and do well over the ensuing six-month period. Typically they buy cyclicals over defensives and mid caps do well. Only at the trough can the investment case for financials be made convincingly, although they have bounced encouragingly off multiyear lows so far.
"Thereafter we see clouds looming again. The huge fiscal stimulus leaves us all with a huge debt burden while the monetary authorities will be looking to take some earlier easing off the table.
"Our best guess is that the cross section over the next three years will look like recession-revival-recession, not an obviously propitious environment for equity investing although, as ever, the skill will be to get the timing right and the thematic call right."
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