Fodder for the bulls

Last week Merrill Lynch produced a report entitled "I am so bullish, I am bearish", a play on the Warren Buffet saying, when everyone else gets greedy I get fearful. One is always tempted to be wary when there is a plethora of good news, but several articles grabbed our eye that could be considered as providing a continual supportive backdrop for equities going forward.

The first one was a report produced by Markit, data reference provider across asset classes, which suggests they believe dividends amongst the largest UK listed firms will surge by another 9% in the next financial year, following a significant rise this year. The FTSE 100 continues to offer a greater real return than 10-year gilts, a phenomenon that has not happened since the 60's except for the past few years. If Markit is correct and bond yields remain where they are and equity dividends do continue to grow, this should provide a fairly solid support for equity investors.

The next piece of research of note, discussed a point we often refer to: the move pension funds have made over the past 25 years to reduce equity exposure. But according to the FT this may be about to change. In an article entitled "UK pension funds set to return to equities", pension funds are set to return to their role as one of the main owners of UK equities. In 1989 pension funds owned 30pct of the UK equity market, at the end of 2012 they owned less than 5pct, according to UBS. One of the reasons for the change in heart has been the change in legislation by George Osborne with regard to annuities.

The next article refers to the IMF's outlook for the global economy, as it encourages governments to continue to invest in infrastructure to spur on the global economy. In a speech in France over the weekend the IMF Managing Director, Ms Lagarde, expressed the view that after a sluggish start to the year, the global economy will pick up in the second half and will accelerate further in 2015.

Finally, and this one is a bit more of a speculative view, the performance of investment managers this year, or lack of it, has been well documented. The hedge fund community has not been excused from this lack of performance. According to the HSBC hedge fund report, the wider hedge fund industry is up 1.6% year to date. This performance, one would speculate, has partly been born out from a lack of volatility, and a possible nervousness as to the resilience of equities in the face of the Fed tapering. In our opinion as the year progresses hedge funds will be forced to address this performance by taking greater risks, this could take the form of increasing their exposure to equities.

One always has to be mindful of equity market corrections, and who knows what will cause the next one, but when it comes, if these observations have some base of fact the setbacks will hopefully be just that.

Posted on July 8, 2014 .