James Capel yesterday held its annual global investment seminar, labelled 'Expect nothing and you won't be disappointed'. The various Capel specialists looked at different segments of the world securities market, but the message for investors in Britain was that, while the UK bull market probably has a few more months to run, 1993 looks like being a much more difficult year than 1992.
The argument essentially is that UK shares are no longer particularly cheap. They were cheap in September when the FT-SE 100 index was some 20 per cent lower than today, but the recent rise means that perhaps half the post-devaluation revaluation has been reflected in prices and from now on further rises will depend on a sustained recovery in earnings. Looking ahead, there are three sources of concern: the slowness of the economic recovery, the ability of companies to increase dividends, and the need for more conservative accounting policies.
As far as the recovery is concerned, Capel expects the UK to grow by only 0.8 per cent next year and, perhaps more worrying from the investment point of view, the Group of Seven industrial countries will grow by an average of only 1.6 per cent. (World growth matters more than British from the investor's point of view because 55 per cent of the profits of the FT-SE 100 companies come from abroad).
Dividend cover is at the very bottom of the post-war range at 1.8 and, while dividend growth is recovering, it is likely to be subdued through the 1990s - as profits recover next year, much of the recovery will go into building the cover for dividends, rather than increasing the dividends themselves.
And further, the fact that some British companies have used adventurous accounting techniques to boost published profits is being rumbled by the markets, which will in future look much more closely at the quality of a company's accounts. There could be a 'Snow White' factor, where the companies that have used particularly cautious accounting practices will benefit.
Yet there is still some momentum in the present run-up of the market, and Paul Walton, Capel's UK strategist, sees a peak of the Footsie around 3,200 in the first quarter of next year, before the market moves into a more volatile period. Moral: buy 'safe' stocks - the ones that have done well in the past two or three years - rather than ones that will depend on the recovery taking off next year.
This caution is quite close to the mood of a similar seminar last week held by UBS Phillips & Drew, though the projected profile of the FT-SE 100 index is slightly different. P&D has cut its mid- 1993 target for the FT-SE 100 to 2,700; in other words it expects the market to go sideways until the middle of next year. It does then expect some rise in share prices, to 2,900 by end-1993. While it is confident that the UK recovery is secure (more confident than the Chancellor's advisers, if the Treasury paper published yesterday is any guide), it points out that the market has risen by 40 per cent over the past two years, while industrial earnings have fallen by 20 per cent. Like Capel, P&D clearly believes the investment benefit from an earnings recovery comes in advance of the recovery itself.
If next year looks like being a difficult one for equity investors, would they be better off in gilts? Capel takes the view that they would not, even though there will be a shift of porfolios towards fixed- interest securities in the next two or three years. Capel argues that on anything other than a short-term view equities are still likely to outperform gilts, and, looking backwards, even when gilts do outperform equities they do so by a much smaller margin. So it is risky to be out of the equity market.
Yet the institutions will shift their portfolios. Why? Because there will be an enormous supply of fixed-interest securities around the world - the average fiscal deficit of the Group of Seven will be more than 5 per cent of GDP - and the history of the 1980s suggests that if governments have large amounts of debt to sell they will, somehow or other, do so.
This feels right. It certainly also presents an interesting proposition to nimble personal investors, who do not have to be in either gilts or equities, but are free to move funds in and out of deposits in a way that institutional investors would find hard to explain to their trustees.
These nimble personal investors should, if the Capel view is right, hold their portfolio of equities through to the early spring, or until the index approaches 3,200. They should then move into cash while the 'consolidation phase' (or fall, in plain English) takes place, and await the next upward move of share prices, perhaps in 1994, perhaps further away than that. As the old adage goes: 'Sell in May and go away', though it might be wiser to sell in April, just to be on the safe side. By the summer of next year cash ought to be starting to yield more, as the interest rate cycle turns upwards again.
Of course this is all no more than the cautious thoughts of clever, highly-paid people in the City, and even clever highly-paid people get things wrong. But the caution is interesting, because it is coming from people whose job it is to persuade professional investors to buy equities rather than fixed-interest securities, property and the like. If it came from a gilt specialist it would be different, because you would expect it. Clearly both Capel and Phillips & Drew feel that their long-term relationship with their clients is best served by warning them that the good times (for investors) may not continue to roll.
None of this means that the UK economy will have a bad 1993. Some growth, at least, is surely going to take place. But the market has been waiting for that growth for a long, long time and, paradoxically, the evidence that the economy might at last be on the mend may well turn out to be signal that the bull market in equities is nearing its end.Reuse content