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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: FTSE 100 passes five year high – why? OECD upbeat about being down. China’s recovery wilts. House price recovery still elusive. Companies in the news: Anite, Cobham 


FTSE 100 passes five year high
why?

And then it closed at 6503. That is the highest closing price for the index leading companies in the UK since the tail end of 2007. The index is now just 217 points from passing the highest level so far this century (its 21st century peak occurred on 31 October 2007 with a reading of 6721) and 426 points off the all-time high of 6930, set on 30 December 1999.

Oh to have bought a nice portfolio spread across the FTSE 100 on 5 March 2009. That day the index closed at 3529. That means the index has risen 84 per cent since that day; throw in dividends, and one might say “Yep, that was a day of opportunity, all right.” It is just that at that time, it would have been impossible to have worked out that the market had reached bottom. And if you know anyone who bought only on that day, does that make them the personification of a savvy investor, or just plain lucky?

Of course, in the US, the Dow is setting all-time highs with tedious regularity.

You can kind of see why the Dow is doing so well. Setting aside that the data for Q4 2012 indicated that the US economy grew by a tiny 0.1 per cent (annualised) – all the other surveys and data from PMIs, job stats and consumer confidence point upwards.

But why the FTSE 100?

The ‘Guardian’ headlined today with: “US economy data lifts FTSE 100 index to five-year-high.” Yet if you read the article, there is no mention of this US data. In fact the data that supposedly lifted the index came out at the end of last week, but maybe the fact that the newspaper paid such little attention to the factors that lifted shares is pretty telling.

In fact the economic news is gloomy.

Data out yesterday showed that industrial production in France contracted 1.2 per cent, and there is talk of France being in triple dip recession. So that’s one of our main export markets looking pretty awful.

You might, of course, say that the FTSE 100 is not so much a bellwether of the UK economy but of the global economy.

But as the item below shows, there are signs that China’s eagerly awaited recovery is stuttering. And as plenty of pieces here have shown of late, the rest of the BRICs have problems galore.

Truth is there is one underlying reason for the strength of the FTSE 100, and that is you know who. And indeed you know it: the ‘who’ is Mervyn King and the ‘it’ is QE.

The question remains: is a stock market growing on the back of near zero interest rates and unprecedented central bank bond buying sustainable? What will happen when rates rise and QE goes into reverse? Maybe these things will only happen when the economy is booming, and it won’t matter.

Perhaps that is right. But if the economy is not booming when the baby boomers have mostly retired, expect tears.

OECD upbeat about being down

Yet, the latest report from the OECD was fairly upbeat. If you want a reason to justify rises in the stock market, maybe this is it. Although, frankly, its readings are not that good.

The OECD composite leading indicators are designed to anticipate turning-points in economic activity relative to trends.

So here are the latest results:

In the US and Japan, growth is firming. In Germany and Russia the indicators suggest growth is set to pick–up.

The indicators point to weak growth for Canada.

For the UK, the OECD says its indicators point to growth being close to its long term trend rate, but with a slowing momentum.

For China, India and Brazil the prognosis is for growth to be below trend.

And finally, in a kind of bottom place are Italy and France, which are currently seeing declines in growth. The OECD data suggests no further declines.

On the whole then not a bad set of data, but surely not good enough to justify stocks hitting five year and all-time highs.

China’s recovery wilts

The relief was palpable; at least you could see it in stock markets. China was back. The data earlier this year made it clear that China was seeing a pick-up. All it had suffered from was a soft-landing – nothing worse.

Looking forward, the days of growth in excess of 10 per cent are surely over, but then again growth of 7.5 per cent or more is really pretty impressive.

That was the general feeling.

The latest data is not quite so good, however.

In the year to January and February, growth in industrial production was 9.9 per cent from 10.3 per cent in the year to December. Growth in retail sales fell from 15.2 per cent to 12.3 per cent.

You might respond by saying yes but what about the Chinese New Year – did that not distort the readings? Well it shouldn’t have. That is why at this time of the year data relates to January and February – to even out the effect of the annual festivities.

In fact, during the holiday season retail sales saw their weakest growth since 2004.

Investment into areas other than infrastructure and property slowed, but fixed investment growth leapt from 19.8 per cent in December to 21.2 per cent. Property sales surged an enormous 49.5 per cent and output growth doubled from the rate seen in December to 10.8 per cent. Yet inventories of unsold properties were 17.7 per cent higher at the end of February than at the end of last year.

In short, the long waited rebalancing from growth led by investment into infrastructure and property to consumption and more innovative business is not occurring.

Wen Jiabao, China’s outgoing Premier, made his final farewell last week. In his speech he outlined the above problems as precisely the issues that have to be death with.

They are not being dealt with. The fears of a great bubble of China are still relevant.

House price recovery still elusive

February was a good month for the UK housing market. According to the Nationwide, house prices rose 0.2 per cent in the month, and were flat over the past 12 months. According to the Halifax survey, they rose 1.9 per cent in the three months to February compared to the previous three month period. They were also up 1.9 per cent on a year ago. According to Hometrack, February saw a 0.1 per cent rise.

It was the first time all three had house prices rising in a month (or in the case of Halifax, three month period) for a very long time.

According to the latest survey from the Royal Institution of Charted Surveyors (RICS), in February the number of houses sold in the UK was at its highest level in two and a half years.

All in all then, that is all pretty bullish for the UK housing market.

But then again the RICS headline index – produced by taking the percentage difference between surveyors who said prices were down from those who said up – is still negative. In fact at minus 6, it was the lowest reading since November. RICS said: “While in negative territory, prices have now remained relatively stable since the autumn.” Yes they have indeed, but that elusive point when the index moves across the axis, from negative to positive, is still remaining precisely that – elusive.

Peter Bolton King, RICS Global Residential Director, said: “Even with activity running at its best level since the middle of 2010, it is still well down on its pre-crisis norm.”

Hometrack said: “Looking ahead to spring we expect both demand and supply to grow. However higher stamp duty costs in Southern England will remain a disincentive to sell, creating scarcity and a support to headline prices.”

The Nationwide’s Robert Gardner said: “While the economic backdrop remains challenging, there are reasons for cautious optimism that activity will gather momentum in the months ahead. In particular, employment is rising at the fastest pace since the late 1990s which, if maintained, should help support demand for homes.  However, progress is likely to be gradual, as stubbornly high inflation will continue to exert pressure on household budgets. Moreover, buyer confidence is likely to remain fragile until there are signs that the wider economic recovery is firmly entrenched.”

Martin Ellis, housing economist at Lloyds, said: “We expect to see a national increase in house prices over the course of 2013. Weak income growth and continuing below-trend economic growth, however, are likely to remain significant constraints on housing demand”

Companies in the news

Bull: Tempus at the ‘Times’ felt the recent falls in the share price of Anite – software solutions for the international wireless and leisure travel industries – were overdone and said right now may be a rare buying opportunity.

Bull and bear: At the ‘Telegraph’, Questor was less sure of defence and aerospace manufacturer Cobham () and concluded “hold”.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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