People with money in equities have had their nerves severely tested recently. The FTSE 100 index of Britain’s leading shares plunged 9% in May after hitting a five-year high of 6,133 in April. While it has since recovered most of those losses, ending the week at 5,949, only 184 points below April’s high, it has been a roller-coaster ride, with the index suffering some heavy falls as well as sharp rises.
Summer is traditionally a sluggish time for stock markets, hence the adage that investors should “sell in May and go away, come back again on St Leger Day”. The St Leger classic horse race is normally run early in September — this year it is taking place next Saturday.
The saying arose because trading often slumped over the summer when many in the City abandoned their desks to follow sporting events such as Ascot, Wimbledon and the Henley Regatta. The St Leger race symbolised the end of the holiday season and a return to work.
Some professionals think markets will follow the script this year and are predicting strong gains from here, particularly as companies are still delivering good results and have strong balance sheets, highlighted by continued takeover activity.
Stephen Whittaker, who runs the New Star UK Growth fund, is one of the bulls. He thinks the Footsie will end the year 400 to 500 points higher than it is at the moment, which would take it to about 6,400 — its highest level for six years.
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He believes concerns about an economic slowdown in Britain and the US are overblown. “Everyone seems to be worried the US is going into recession, but that won’t happen because if it looks likely the Federal Reserve will cut interest rates,” he said. “With rates at 5%, it has plenty of room for manoeuvre.”
Simon King, who co-manages the Gartmore UK Focus fund, is equally bullish.
He said: “People are over-reacting to the risk of a slowdown. As far as we can see, the fundamentals still look good. Companies are delivering in terms of profit and dividends, the UK balance sheet remains very strong and consumers have proved to be pretty resilient.”
Others are more cautious, or bearish, because of signs that the US housing market is wobbling. Housebuilding in America has suffered its biggest fall in a decade and prices are flatlining and poised to fall.
This is worrying because the housing market has recently generated more than half America’s economic growth. Over the past few years, consumers have borrowed heavily against the value of their homes, fuelling high-street spending. This has in turn fuelled global trade because US shoppers have such a big impact on the world economy.
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If American consumers are no longer able to borrow against their homes because of a property slowdown, it could prove damaging for the global economy and international markets.
Julian Jessop of Capital Economics, a consultancy, said: “Each new day seems to throw up more evidence pointing to a downturn in the US housing market. We have long been predicting that even a benign end to the housing boom, in which prices level out, would cause a drop in US economic growth to 2% in 2007. The more evidence we see, however, the bigger the risks.
“If the housing market continues to fall apart at this rate the economy could easily slip into recession next year.”
Recession would lead to a rush for safe-haven assets such as government bonds and gold, but most analysts think the American economy will avoid a slump and simply slow down.
In this kind of environment shares could still do well, especially if the Fed cuts rates, but it will pay to be cautious.
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Fund manager F&C has just chopped the proportion of its global portfolios in equities to its lowest level for three years.
Paul Niven at F&C said: “Three years of equity gains have been driven by improving corporate fundamentals. That appears close to an end. We expect a re-emergence of growth concerns in the near term, and markets appear overly bullish at present.”
Neil Woodford, who manages Invesco Perpetual Income and High Income, also thinks there could be tough times ahead, so he has been buying “defensive” shares. These are stocks that should weather an economic downturn, such as utilities, telecoms and consumer services.
If you agree with the bears, you may want to go with a defensive manager.
Justin Modray at Bestinvest, an adviser, suggests Invesco Perpetual High Income or Rensburg UK Equity Income. Juliet Schooling at Chelsea Financial Services, another adviser, likes Gartmore UK Equity Income.
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Anna Bowes at AWD Chase de Vere suggests a cautious managed fund such as Investec Cautious Managed. These tend to fare well in turbulent times because they invest in bonds as well as equities. Bonds tend to perform well when the economy is slowing.
If the bulls are right you may prefer a more aggressive fund. Advisers suggest Axa Framlington UK Smaller Companies, Gartmore UK Focus, M&G Recovery and New Star UK Growth.
You could try to hedge your bets by drip-feeding your money into the market on a monthly basis rather than investing a lump sum. That way you do not have to worry about investing at the top of the market.
However, Bowes believes the best defence is having a balanced portfolio. She said: “You shouldn’t base an investment decision on your short-term view. Instead it is important to have global diversification which should even out the peaks and troughs over time.”