Weekly outlook

Spring is in the air

By Tom Stevenson, 18 March 2009

The mood music in the markets has changed over the past two weeks.

Perhaps it is no more than a seasonal skip in the step – lengthening days, the first buds opening on the trees and a hint of warmth in the sun. Whatever the reason, the market has a different feel from just two weeks ago when the FTSE100 hit a six-year low. For a growing number of investors, spring is in the air. It has been a rapid turnaround in sentiment. When the UK’s benchmark index closed at 3,512 on March 3, the fear was that the March 2003 low of 3,287 might be breached. And then where would it end? If shares had gone below the low-point of the 2000-2003 bear market, the headlines would have trumpeted a 14-year low because the last time the FTSE 100 had been lower was in May 1995.

"Anyone tempted back in finds themselves in good company" Tom Stevenson

It is almost as if the market took one look at that dire prospect and decided enough was enough. By Monday of this week, shares had regained just over 350 points at 3,864 – still well down on the year to date – the high point of 2009 was on January 6 at 4,639 - but the panic seemed to be over.

The big beasts are prowling

Some of the biggest names in investment have come out in the last week or so to suggest we may be close to the low-point. Fidelity’s own Anthony Bolton, speaking at a pensions industry conference in Edinburgh, said that three factors that he uses to gauge market turning points had all moved to extreme levels in the first week of March: the length and depth of the bear market; sentiment – how investors are behaving and thinking; and valuations.

Speaking to the FT, Mr Bolton said that he thought all risky assets – corporate bonds and property, for example, as well as equities – now looked cheap. The only asset he was wary of was government bonds, where he suspected a bubble might be building.

Another well-regarded fund-manager who has turned positive is Jeremy Grantham of asset manager GMO. He told investors that markets tend to turn “when all looks black, but just a subtle shade less black than the day before”. A similar sentiment to Anthony Bolton’s observation that a bear market ends not when things get better but when they stop getting worse.

Attractive valuations

Other market watchers in the City have turned more positive in recent weeks. Peter Oppenheimer, a strategist at Goldman Sachs, had warned at the end of last year that valuations were not cheap enough, but he now believes they fully reflect the likely downturn in company profits.

James Montier, an expert in behavioural finance at Societe Generale, said that buying shares when they were this cheap in the past had given investors a better than evens chance of enjoying a 10% a year return for the next ten years even if in the short-term shares tended to get even cheaper still for a few months.

Meanwhile, Tim Bond, Head of Global Asset Allocation at Barclays Capital, said he had observed investors responding emotionally and irrationally to events like the near-nationalisation of banks, an indication that the bottom might be close at hand. He also said investors were ignoring tangible signs – like a rising copper price – that the worst might be over for the global economy.

Some investors talk about a “curse of value” – the way in which investors who focus on buying shares when their valuations are most attractive have a tendency to sell out too soon in a bull market and get back in before a bear market has run its course. Anthony Bolton has admitted that he has a tendency to get back into the market a little soon at times like this.

It is also true that being cheap is a necessary but not a sufficient reason for the market to rally sustainably. No-one knows whether the bear market is really over, but anyone who is tempted back into the market at this level is starting to find themselves in good company.

As Societe Generale’s Montier concludes: “We have to recognise that we simply won’t catch the exact bottom, except via extreme good fortune. Valuation gives a good signal as to when to return to the markets. Buy when it’s cheap – if not then, when?”