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

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