Source: FE Trustnet
After a year characterised by huge swings in sentiment, driven primarily by European politicians dithering over the debt crisis, equity bulls will be pleased that investors have started 2012 optimistically.
Bears, on the other hand, are concerned that the structural problems that plagued money markets in 2011 have not disappeared and say investors should be cautious of getting carried away.
FE Alpha Manager Trevor Greetham, director of asset allocation at Fidelity, says investors would be foolish to ignore the structural headwinds that anchored the FTSE in the low 5,000s last year.
"A bullish case rests on a US-led economic upswing strong enough to offset anticipated weakness in the European economy and it assumes the worst-case scenario of a messy euro break-up can be avoided. US data has been resilient, but as things stand I am doubtful financial contagion from Europe can be avoided."
Greetham, who manages the £585m Fidelity Multi Asset Strategic fund, says that aside from the well-documented problems in the eurozone, there are too many issues that can go wrong for the global economy to allocate aggressively to equities yet.
"Global growth is slowing and a peak in inflation will enable central banks to ease policy with force," he said. "However, it will be hard to offset a synchronised slowdown in the European Union, an economic area in aggregate larger than either the US or Chinese economies."
Data from FE Analytics shows that the Fidelity Multi Asset Strategic fund has returned 29 per cent over the last three years while the average fund in the Mixed Investment 20-60% Shares sector (formerly Cautious Managed) has returned 25 per cent.
Performance of fund and manager vs sector over 3-yrs
Source: FE Analytics
Greetham added: "The ability of the US to underpin global activity is constrained by political deadlock over fiscal policy and China is unlikely to fill the gap. Its exports to the developed world are slowing and monetary easing is likely to be incremental, with inflation still uncomfortably high."
Others are more optimistic, though. David Jane, manager of the TM Darwin Multi Asset fund and former head of equities at M&G, says that much of the eurozone debt malaise has been priced in and investors focusing on company fundamentals have reason to be cheerful.
"Looking at all the asset classes and what each has to offer, it is self-evident that equities look fundamentally better value than any other investment," he said. "We’ve been staring down the barrel of the eurozone crisis and I’m sure it’ll rear its head again, but if you take that away and focus on the real world, the US economy is strengthening every day, the UK is starting to improve and Asia is showing signs of economic growth."
The FTSE has recovered half of its 2011 losses so far this year to reach a high of 5,710, while the S&P 500 has also made a strong start.
Jane feels so good about the markets that he is scaling back his exposure to utilities, tobacco and pharmaceuticals in favour of cyclicals.
"I’m moving away from the more cowardly defensives in favour of more economically growth-sensitive stocks, particularly in the US and Asia. I’m quite confident of markets here and the more people worry then the more potential upside there is for me," he finished.
Premier’s Chris White yesterday told FE Trustnet he thought the FTSE could go as high as 6,000 by the end of the year.