Boris is back at work after neatly dovetailing his Covid’ recovery with the birth of his 5th child, Captain Tom turns 100 after raising over £31m for the NHS (what a heartening story) and “technically” the UK enjoyed a bull market as the FTSE100 passed 6,000 – more than the defined 20% above it’s low of 4,993 on 23rd March.
Three somewhat remarkable headlines, all worthy of note, albeit perhaps with slightly different sentiment. Childbirth and a 100th birthday are celebrations of life are a linear journey compared to the FTSE100 as it passed through 6,000 for the second time this year. So, is the market right?
Financial parlance describes a rising market as a bull market and those upbeat about economic growth as bullish. Conversely, a bear market is a falling market and the technical definition of a bear market, is a fall of 20% or more from peak to trough. Technically, the Covid bear has been shortest bear market in history.
A quick resume: Recent updates have referred to the quarterly reporting period for company earnings, which are an important factor in the valuation of any company. There are different basis on which a company may be valued and various formulae used. One of the more common reference points or checks for a company share price is the Price /Earnings ratio. It’s a simple enough ratio that considers the Price of a company share relative to the Earnings per share (ie the dividend that share pays).
Share prices are typically quoted on a daily basis whereas the earnings vary depending on the time period considered and are either historic earnings, known as trailing, or forecast, future earnings. It’s commonplace for both trailing and future P/E to be considered to arrive at a valuation. Future earnings may be discounted, depending on the economic outlook. The bigger the discount on future earnings, the more expensive the share price is relative to earnings.
As the virus threat unfolded and the locked down economic outlook became bleaker, future earnings became increasingly discounted. This was reflected in both individual share prices falling and across broader stock market values. The government and central bank backed stimulus was well received by markets which it seems safe to finally now say, stabilised and have recovered significant value albeit from a very low point.
Further relaxation of central banks buying criteria to include the purchase of fallen angel bonds arguably means a marginal transfer of risk from financial market to central bank. In other words, out of investor favour, fallen angel company bonds would ordinarily fall further in value in the absence of willing buyers (investors). However, those values are now partly supported by central banks as buyers.
Exit strategies are increasingly referred to in both media and political narrative as the infection and mortality rates slowly ease. It seems the stock market expectation is that an earlier return to work is more likely that a prolonged lockdown albeit the subsequent recovery will be slower rather than the bounce previously referred to.
In conclusion market values may well be fair, albeit it positive news flow will be critical to positive market movement: further reductions in infection spread and mortality together with increased testing (this feels repetitive to write too…!) and favourable government decisions on how and when the economy can be eased from lockdown remain key. There is still a niggling concern over reported earnings and whether markets have factored in all the bad news.
As a return to work unfolds, I expect there will be some subtle repositioning required within portfolios. There are almost daily discussions with our analysts and the various investment professionals with whom we work, around the likely shape and timing of this. A key consideration around any revision will of course be maintaining the risk and reward profile of portfolios.
One of the challenges at this time is maintaining what I hope is meaningful content in communications. I’ll be hosting webinars later next month and have some interesting guests from both the political and investment world who have kindly agreed to contribute their views.
I’ve recently signed off with weekly FTSE100 performance, reflecting the exceptional events and unprecedented market disruption we’ve witnessed. As a long term investor, I am far more familiar with annualised or quarterly data as a reference point. Moving to consider the timeline and nature of recovery it seems more appropriate to consider the FTSE100 closing value last night of 5,901 in the context of closing values in recent years and 2008:
| Year | Closing level of FTSE 100 | Change from previous year end |
| 2019 | 7,542 | 12.1% |
| 2018 | 6,728 | -12.5% |
| 2017 | 7,688 | 7.6% |
| 2016 | 7,143 | 14.4% |
| 2015 | 6,242 | 5.8% |
| 2008 | 4,434 | -31.3% |
These are year end values whereas media headlines have focused more on the low of 4,993 on 23rd March and the year to date high of 7,674 on 16th January. This arguably sensationalises market movements and perhaps serves news media sales than investors. While your portfolio invests in the UK and other stock markets, this is part of a broad spread of investments, diversified across sectors and so overall portfolio growth is not dependant on the FTSE100.
As we approach the end of another locked down week, following a more upbeat Government briefing as Boris returns to announce a decline in virus cases and reference to phase 2 and how restrictions may be eased. I hope you and your family remain safe and well.
Regards
Kenny