Market correction “only a matter of time”
Equity markets have been ticking along quite nicely since the summer, but experts doubt whether they will be able to keep up their strong run.
Current market sentiment is overly optimistic and the recovery in the UK and eurozone will be short lived, according to global strategist Robert Jukes, who believes long term plans to bring growth back to the economies are too vague.
Jukes, who works at Colllins Stewart Wealth Management, believes there is too much hype surrounding global markets at the moment, and expects weaker market performance in 2013.
He points to the FTSE 100’s recent surge, which is up 12.41 per cent over one year, as unsustainable.
Performance of index over 1yr
Source: FE Analytics
“Will the FTSE reach 6,000 or 6,500 points by the end of the year? It may do if this unjustified market optimism continues,” he said. “In reality, I expect a correction in the forecast of markets in the coming months."
“I think markets have gone up far too quickly. The optimism we have seen towards global markets is unjustified.”
He believes this is especially the case in Europe, and highlights two main examples as proof of markets' over-optimism.
“Firstly, we saw it over Thursday and Friday’s summit on the legal frameworks of Europe’s banks,” he said. “They have now gone home, but we still don’t know what it entails. There is no clear mechanism and we don’t know how many banks are covered.”
“[French President François] Hollande has said that all banks will be covered by this legal framework by January, but [German Chancellor Angela] Merkel believes this is too ambitious and that some should be covered directly while other should be covered indirectly. This doesn’t play too well for European optimists.”
Jukes added: “The second area is the de-coupling between governments and their banks, which in spite of all the talk hasn’t yet happened.”
“I think the European outlook for 2013 is far more bearish than the majority think it will be,” he finished.
Ian Kernohan, economist at Royal London Asset Management, thinks the FTSE could hit the 6,000 mark by the end of the year, but needs another piece of positive macro news for this to happen.
“I don’t think the FTSE will the heights of 6,500 but I can see it getting to 6,000 points,” he said. “We are only around 100 points off that now so it could happen by the end of the year.”
“But for this to happen, markets need some better news from the continent and the US. After the US election we will have a clearer idea of how the fiscal cliff will be addressed, which will have a big impact on the FTSE.”
Kernohan believes that the ultra-bearish feelings towards Europe that were projected at the start of the year were too sensationalist. However, he doesn’t think the recent strong run – which has seen the Dax and the DJ Euro Stoxx 50 climb more than 12 per cent since the beginning of August – can sustain itself for much longer.
“While the ECB’s outright monetary transaction (OMT) programme does not signal the end to the euro crisis, it was a key development that turned the tide in the crisis during the late summer,” he said.
“As things now stand, peripheral yields have fallen back and the situation looks more secure than it has done for some time, even if the underlying reasons for the crisis remain unresolved.”
“However, the euro situation remains fragile and hostage to political pressures.”