Investment Insider: End in sight for printing money, so what now?

Bull market may drive cyclical businesses so far ignored in recession

The US has been printing money like never before to stave off recession. Whether it has worked is up for debate but there are signs the US is returning to steady growth. Unemployment levels have stabilised, the housing market is improving and consumers are becoming more confident.

Consequently, Ben Bernanke, the head of the US Federal Reserve, has hinted it may be time to think about pumping a little less money into the economy. However, investors and traders who have become accustomed to a diet of cheap money have taken fright at the thought of coping without assistance from the Fed.

What's interesting about America's economic rehabilitation is that, although world stock markets have responded positively, they have not done so in the usual way.

Generally, when economies recover, investors react by buying cyclical shares – businesses that are tied to the way an economy moves.

Property developers are a good example of cyclical shares. Retailers and banks are other examples.

However, the stock market recovery has this time been led by defensive shares, which is odd. That's because such shares are usually some of the last to recover.

That said, the resilient performance of defensive shares such as utility companies, telecoms and cigarette makers was not entirely unexpected, as the ultra-low interest rate policy had forced income investors to turn to dividend-paying companies as an alternative to savings accounts and government bonds for regular income.

Consequently, the market rally has been driven predominantly by companies such as Centrica, SSE, British American Tobacco, Royal Dutch Shell and other similar shares that are generally regarded as reliable dividend payers.

Curiously, cyclical shares have lagged. But if the US recovery is for real, the next leg of the bull market may be driven by cyclical businesses that have been so far been largely ignored.

But income investors who bought dividend-paying shares should not be unduly concerned.

There has been no suggestion dividends will be cut. So, while income investors may experience temporary loss of capital, the income from their investments should not diminish.

Additionally, a fall in the share price of income shares could be a good opportunity to purchase even more shares at lower prices. By doing so, you could boost the income you receive from these companies when they next hand out their dividend cheques.

Investors with an eye on the economic cycle may want to look at companies that tend to do well when the economy is showing early signs of improvement.

Banks could be an interesting area. HSBC and Barclays are expected to report a hefty rise in profits this year and next. Retailers such as Next may also improve as consumer confidence rises.

It appears the reports that the Fed may reduce its money-printing have worried the market.

However, the fact the US government believes it has done enough to nurse the economy back to health should be seen as positive rather than a negative.

It means some sense of normality may finally return to US markets, and to markets elsewhere, after years of financial oddity.

This should be a cause for celebration rather than a reason to be despondent.

David Kuo is director of fool.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Content Writer - Global Financial Services

    £25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

    Recruitment Genius: Web Developer - PHP

    £35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

    Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

    £15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

    Recruitment Genius: Loan Underwriter

    £18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

    Day In a Page

    Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition

    Orthorexia nervosa

    How becoming obsessed with healthy eating can lead to malnutrition
    Lady Chatterley is not obscene, says TV director

    Lady Chatterley’s Lover

    Director Jed Mercurio on why DH Lawrence's novel 'is not an obscene story'
    Farmers in tropical forests are training ants to kill off bigger pests

    Set a pest to catch a pest

    Farmers in tropical forests are training ants to kill off bigger pests
    Mexico: A culture that celebrates darkness as an essential part of life

    The dark side of Mexico

    A culture that celebrates darkness as an essential part of life
    Being sexually assaulted was not your fault, Chrissie Hynde. Don't tell other victims it was theirs

    Being sexually assaulted was not your fault, Chrissie Hynde

    Please don't tell other victims it was theirs
    A nap a day could save your life - and here's why

    A nap a day could save your life

    A midday nap is 'associated with reduced blood pressure'
    If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

    If men are so obsessed by sex...

    ...why do they clam up when confronted with the grisly realities?
    The comedy titans of Avalon on their attempt to save BBC3

    Jon Thoday and Richard Allen-Turner

    The comedy titans of Avalon on their attempt to save BBC3
    The bathing machine is back... but with a difference

    Rolling in the deep

    The bathing machine is back but with a difference
    Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

    Conservatives plot a motoring revolution

    Draft report reveals biggest reform to regulations since driving test introduced in 1935
    The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

    The Silk Roads that trace civilisation

    Long before the West rose to power, Asian pathways were connecting peoples and places
    House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

    The honours that shame Britain

    Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
    When it comes to street harassment, we need to talk about race

    'When it comes to street harassment, we need to talk about race'

    Why are black men living the stereotypes and why are we letting them get away with it?
    International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

    International Tap Festival comes to the UK

    Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
    War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

    Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

    Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border