Partner Article

Has the market lost touch with reality?

As we write, the S&P 500 is lingering at yet another all-time high and the UK’s FTSE 100 has maintained its general upward trend, making for what has been a dizzying few months for equity investors, particularly those with developed market exposure. And the rally has continued despite the geopolitical crisis in the Ukraine and the lacklustre economic data coming out of the US economy. Many of our clients are right to wonder whether markets, in continuing to rise, might be sleepwalking towards another bubble. We would answer this question by going back to the first cause of all the investment decisions we take in portfolios – the fundamentals.

Looking at the rally from the standpoint of corporate earnings, it’s clear that equities are comparatively inexpensive. For example, at the end of the other bubbles, such as the tech and telecoms bubble of 2000, the S&P 500 was trading at 28 times forward earnings. At the end of last year, the market was trading at 15 times forward earnings. If we put this into the context of where we are now – in terms of inflation and corporate balance sheets – it is our firm belief that global equities ended 2013 very close to fair value.

Some clients may question this given that inflows from cash hit a decade high last year, but what some commentators on this topic are forgetting is that we started this investment cycle from a very low base. For a long time after the financial crisis hit, investors languished in cash – earning a 0% return for what had started to feel like far too long. However, there are now signs that global recovery remains largely on track – particularly across the developed world, and consumers across the key markets such as the US and UK are in better health than many realise. This long-awaited shift in macroeconomic outlook has helped to coax investors out of the money markets and into more risky assets. Bonds were the earliest beneficiaries of this migration, and now we are seeing its positive effect on equities. So, while February was certainly a good month for stocks, it is worth bearing in mind the magnitude of the crisis that the global economy is still recovering from. The performance we are enjoying today is, ultimately, a continuation of the rebound from those depressed levels.

By Richard Clark and Simon Patterson, Private Bankers at Barclays Wealth and Investment Management, Newcastle

This was posted in Bdaily's Members' News section by Barclays Bank PLC .