Tuesday May 6, 10:07 AM
Bear vs. Bull
By Padraig O'Hannelly
Attempting to time the markets may be a mug's game, but I can't resist at least trying to form an opinion on the state of the economy and the implications for investment.
The problem, as I see it, is that we are not obviously at either
a peak or a trough, to the extent that these things can ever be described as 'obvious'. Bears and bulls can always find plausible cases to make, but the divergence of opinion at the moment seems very stark. Let's look at the arguments:The bear case According to some analysts, we are facing the perfect storm.
The scale of banking losses is still unclear, nearly a year after the credit crisis began; there may be more bad news lurking out there. Banks need to strengthen their balance sheets, which means less lending to consumers and businesses. This could last for years.
The consequence for businesses is that they'll have difficulty sourcing debt, and when they find it they'll have to pay more for it. It may not be just the banks that have to resort to dilutive rights issues.
For consumers, it means less cash to spend. If you accept that the growth in credit over the past decade has contributed to a buoyant economy, surely the restriction of credit will result in less spending and lower profits?
Similarly in the housing market: expensive and scarce mortgages will reduce affordability, causing prices to fall, which further lowers the amount that banks are prepared to lend. First-time buyers will delay getting on the 'property ladder.' When people feel less wealthy, they spend less.
Add to that the effect of rising food and energy prices, and the apparent futility of Fed interest rate cuts, then things are looking pretty gloomy.
Taken to the extreme, some would argue that civilisation will grind to a halt as the oil age draws to a close, and that the asset appreciation of the past century was an aberration that will be corrected as we stock up on ammunition and bottled water. Scary stuff.
Unless, like Champion Shares editor Maynard Paton, you're of a more bullish disposition. The bull case There are several factors that could mitigate or outweigh the risks mentioned above. Firstly, shares look cheap. Even if the economy is slowing, it may be OK if you can buy into companies at the right price. On a dividend yield of 4.2%, and a PE of 11, the UK market doesn't look overstretched.
Over the long-term, shares and property have always risen in value. While property has soared, shares have never fully recovered from the dotcom crash, and nobody is going to ring a bell to tell you the market is about to take off again. Better to be invested at current prices.
And remember that money is not scarce everywhere; China and the oil-producing countries are awash with the stuff, so it's not unreasonable to expect their cash-rich businesses and sovereign wealth funds of to snap up some bargains.
Also, British exporters will benefit from the strong Euro. And the conclusion is? I wish I knew. While there is a lot of gloom around, I don't see wholesale capitulation. Many shares, especially smaller companies, appear at first glance to be worth buying at the moment. But if you accept the more extreme bear case, nothing will emerge unscathed, even commodities.
As far as dividend yields and PEs are concerned, the data relates to the past, and doesn't necessarily have any relevance to this year's and next year's performance. Analysts' forecasts are notorious for lagging behind any bad news, rather than accurately predicting it.
I intend to spend more time looking into commodities, although some would argue that that ship has sailed. This may also be a good time for short-selling certain stocks, but note that this is a dangerous and unFoolish activity. At the moment, for better or worse, I'm continuing to hold shares that I feel are under-appreciated by the market.
You can find more debate on these topics on various Motley Fool discussion boards, especially here, here and here.
If you fancy investing in the stock market, take a look at Motley Fool Sharebuilder where you can buy shares for just £1.50 commission.
More: The Next Bull Run
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