There's a feeling that the worst is over, but the real data suggests it's time to be careful.
Even the "bloke in the pub" or the "man on the Clapham omnibus" as the curious idiom goes, knows that debt levels reached giddy heights on both sides of the Atlantic and that this was the major contributory factor in the credit-crunch induced recession.
Actually, this is understating the case. The truth is that reckless borrowing and the systems that allowed it brought the entire global economic system to the very brink of collapse.
Similarly, even those with the most fleeting interest in stock markets could probably have told you a year or so ago that the sudden removal of credit from the economy meant the great British public would be spending less on houses and doing them up, cars, holidays, clothes, eating out and other luxuries.
Everything must go
Consequently, companies in such industries generally saw their share prices hammered whether or not this was really justified. In fact, pretty much everything saw its price hit as around 95% of shares lost money in 2008. This in turn presented manifold buying opportunities for the contrarians and value hunters amongst us -- and we've duly made hay as the sun has shone since late March.
Now there's not quite so much value around. So be it. Patience is a virtue and it's generally best to concentrate on specific stocks rather than macro-economic factors. But I can't help but think that this is also a time to be careful. House prices remain out of touch with the reality of earnings by a long chalk, compared to history. And debt levels remain high. Only the most wealthy 25% of households in the UK had a positive net income last year according to figures from the Office for National Statistics; everyone else was running at a loss.
Too far too quickly
This may be gradually changing, but the reality hasn't really hit home yet. The UK may be emerging from official recession, but the difficulty in obtaining credit -- exacerbated by the continuing fall in house prices, will continue to hit spending and the real economy in my opinion. In other words, whilst the market was being overly pessimistic in March, it may well have boomeranged too far the other way now.
This isn't to say that there aren't still bargains out there in the stock market -- but that they are much fewer and further between, and that it's best to temper any rosy forecasts for future earnings based on the relative optimism of the last six months with a dose of reality. This is particularly true of many (but not all…) consumer-facing stocks, which have risen on what may yet prove to be a temporary relief rally.
A defensive stance
Of course, things may turn out to be ok. We may have the usual kind of muddle through we usually seem to manage. But on the 22nd anniversary of Black Monday, you have to think; "why take the risk?"
Personally, I'm gradually taking more of a defensive stance, concentrating on companies that provide essential services with high barriers to entry and which are likely to be around doing the same thing five years from now. In this category, I include big oil companies, utilities, leading global companies which control resources, food suppliers, and (yes really…) banks.
Further down the food chain, there are still a lot of companies with rock-solid, cash-rich balance sheets which are already profitable and could do well out of sterling's weakness, which will help exports. And it's the weak pound that may yet save the UK economy as we shift painfully from borrowing to exporting.
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