As IG market analyst, Alastair McCaig, pointed out, despite having had the best week in over five years, the FTSE seemed frozen on Friday as it struggled to hang onto the psychological 6000 level.
“Even the strongest monthly retail sales figures for the UK in two years has not been enough to inject enthusiasm into the markets. This inability to keep heading higher is in no small part due to traders’ understanding of how important these Brussels discussions are, and how much they will shape the next six months,” he said as explanation for Friday’s pause.
That is not to say, however that the week has largely been a sea of green on trading screens. Rather, it has been characterised by some significant corporate news and some pretty wild moves both up and down as a result – Anglo American and Rolls Royce to name but two.
For Julie Dean the volatility seen in recent weeks on the FTSE reflect the fact that we are at a turning point in the business cycle.
“QE has lifted asset prices but there has not been a concomitant increase in growth or earnings,” the manager of the Sanditon UK Fund said, adding: “Financial memories are short and people are impatient; this a classic turn down in the profit cycle and volatility increases at turning points.”
Indeed, Dean said, the firm is of the view that the UK market is firmly into the slowdown phase, wherein corporate profitability has peaked and margins are falling as wage growth increases without productivity gains.
“What you need to see now is sales growth, but that remains weak. And, as a result of this combination of weak top line growth and falling margins, you have seen valuations come under pressure,” she said.
Given this scenario, she says the fund is looking at well-capitalised oil and commodities businesses, where she feels valuations have troughed.
