Signs of a recovery amid market gloom
RECENT movements in the headline UK stock market have not been good for investor sentiment.
These movements have more to do with Spanish debt than what is happening at home. A report on European economic activity also highlighted that the Euro area may have fallen into recession in the first quarter. No surprise there then.
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However, the failure of the Spanish bond auction is causing alarm.
Higher rates suggest that investors want more for their money before they are prepared to commit and yield on Spanish debt rose to its highest level this year at 5.7 per cent. Some fear that Spain will need a bailout as it struggles to meet deficit targets and shore up its crippled banks.
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Coupled with this came news from America that it was unlikely to issue any further cheap money as the economy continues to recover. It is this cheap money which has found its way into shares over the last few months and propped up share prices.
The Bank of England last week kept the stimulus at £325bn, which was not unexpected.
The chances of more in the future cannot be ruled out but fade as the economy recovers. We therefore have the perverse situation of economies recovering and markets falling.
Evidence of further growth in the economy emerged last week as the Society of Motor Manufacturers and Traders issued a statement advising that the number of new cars registered in March beat expectations. Car registrations in March are always strong because of the new plate being issued but this year the figures were particularly good.
The services sector in the UK also experienced its strongest growth for nearly two years. This sector accounts for three quarters of national economic activity and has now risen for 15 months in a row, easing concern that the UK will fall into a double dip recession.
A figure over 50 indicates expansion and last month the figure rose to 55.3 from 53.8.
The equivalent figures in Europe are still showing contraction and as this is our largest export market we are not immune to what is happening across the Channel.
However, what does seem apparent is that the recent market move has nothing to do with profitability of companies in the index, or their ability to continue to pay their dividends, and much more to do with sentiment.
When markets react to sentiment often buying opportunities arise and the recent pull back is just that.
Stick to the companies you know well, as highly geared plays on economic recovery may be tempting, but wait a while before taking the plunge.
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