Listen to the music Market Outlook July 2017

Plenty to worry about and full-looking valuations make an uncomfortable combination. Momentum is still OK, but we need to listen out for when the music stops.

 Market Outlook July 2017


Capital returns to June 28th AIM



small cap


mid 250

FTSE 100
1 month -2.8 -1.5 -2.7 -2.1
1 year +39.9 +28.9 +25.6 +20.3
3 years +23.3 +26.0 +24.2 +9.3



A subdued month for UK equities saw the various indices in the table each give back around 2 per cent. Most world equity markets had a quiet June; while oil was noticeably weak, Brent crude falling 10 per cent to $47. The dog days of summer can often be dull, or even a bit choppy, and at the moment it’s easier to point to things that will cause the market to correct rather than push onwards to new high ground.

Since last month we’ve had a general election of course, which had precisely the opposite effect of what the Prime Minister intended. I’ve long maintained that the impact of politics on developed equity markets is overrated, but the prospect of an unstable minority government and the re-emergence of hard-left politics don’t paint a positive picture of the UK for investors.

Walls of worry

Indeed we can add politics to a host of other worries. Normally I like it when the market is worried – after all, bull markets are often said to climb a wall constructed from worry! That’s because worry causes doubt and fear, resulting in low valuations and investor cash being left on the sidelines. Which means that when things turn out to be not as bad as feared, which is usually the case, there’s plenty of room for the market to go up.

Sadly I don’t see it that way at the moment.   


As we discussed last month, with the VIX index near its lows the market is characterised more by complacency than worry. A year ago the pundits were overly fearful of the economy in the wake of the referendum, which provided an opportunity for us to correctly take a more constructive view. However we now seem to have a UK economy that’s slowing and a consumer that feels ready to take a breather. I don’t want to be too negative here, but weaker companies might get found out in this environment.

Less compelling

On top of that, valuations aren’t as cheap as they were. While I don’t think they are too demanding, and we haven’t seen the euphoria we get at a typical market top, it’s a lot harder to find bargains than it was a year ago. A good example is provided by Somero. We tipped it on a p/e of 9 and a series of profit upgrades have produced a great return. It’s now on 13 times current year earnings, which isn’t bad value, but it’s much less compelling than it was back at the start of 2016.   

Listen to the music

So what’s the plan? Since I wouldn’t be surprised to see a setback at some stage, I feel comfortable holding some cash. My default position is to be fully invested in the market, so I’m a bit uncomfortable doing this. I also want to focus on good quality companies that aren’t overly dependent on domestic economic activity. The flipside of this is to be wary of cheap-looking ‘value stocks’ which might turn out to be cheap for a good reason. Meanwhile lots of shares are still going up so I’m still happy to play momentum as a theme, but will keep a keen ear out for when the music stops.



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