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HAMISH MCRAE: Bull market more likely than another crash

If share prices are a crude indicator of confidence in the future of an economy, what should we make of the FTSE100 index closing on Friday at 6,550 – its highest point for nine months? 

Relief after the misery of last spring and a hope that come the summer we will be regaining much of the ground lost to Covid19 and the lockdowns? Or is it more that UK shares, which are very undervalued compared with American ones, are at last beginning to be rerated? 

Or is it simply that all the money that the central banks are printing has to go somewhere, and UK shares are one of the places where the dosh is ending up? 

Going in the right direction?: There is a clear path to an economic recovery next year and the real question is about its speed and timing

The answers to these questions will give us a feeling as to whether we are still in the very early stages of the next bull run for shares, or whether much of the good news is already priced into the markets. 

Relief first. Well, there is certainly some of that. Do you remember back in the spring all those experts opining that it would take years to develop a vaccine, if it could be done at all? They were wrong. The shift in mood over the past month with the confirmation that the vaccines work and are safe has been massive. 

There is a clear path to an economic recovery next year and the real question is about its speed and timing.

How quickly do different countries get back to the peak output they were running at early this year? Optimists think it could be the end of 2021 for most of us, including the UK. Pessimists, which include our Office for Budget Responsibility, think it will be well into 2022. 

Intuitively, I think the present levels of the Footsie – which, remember, reflect the world economy rather than just the UK one – are pricing in a relatively slow recovery. If we race out of the traps next spring, the market could race too. A Footsie above 6,500 has to be set against the fact that it was 7,542 at the end of last year. 

Is there a rerating against America? Well, there has been something wider going one, which is not so much London catching up with Wall Street, but so-called value shares being upgraded against growth ones. 

Value shares, put crudely, are those of companies that do the basics: household goods, food products, oil and gas, clothing, cars, financial services and pharmaceuticals. With the exception of the last one, pharma, they have been pretty unfashionable. 

Growth shares are basically high-tech America, and they have gone bananas. Apple accounts for something like 8 per cent of the S&P 500 index. It is a fine company. So too are Microsoft, Amazon, Alphabet (parent of Google), and Facebook. So too, in its way, is Tesla. 

Only the US has a high-tech sector on anything like this scale, and as a result US markets have vastly outperformed everyone else, especially the UK. 

So the rerating that seems to have started to take place is not so much against America, but rather one of getting the relationship between two different types of enterprise, growth and value, into better kilter. 

UK shares are a beneficiary of that. The further the shift runs, the more our companies will be upgraded. 

And what about all that money the central banks are creating? 

It would be wonderful if our knowledge of monetary economics was good enough to calculate where money went, how it affected wages and prices, house values, exchange rates and so on. It isn’t. The links between what the central banks do when they create the stuff, and what we as individuals and enterprises do when we get it, are too obscure. 

Over the very long run there is some sort of link between money creation and price levels, but only over the very long run. 

However, we can see a housing boom now in the UK and there must be some relationship between that and the fact that mortgage finance is available and cheap. 

And it is available and cheap because the Bank of England is creating industrial quantities of money.

The US Fed is doing the same, so maybe there’s some sort of relationship between that and US shares being at all-time highs. 

Pull all this together and what is the conclusion? 

Mine is that there will be a lot more forces pushing UK shares up in the next few months than pushing them down. 

A long bull market is more likely than another crash.

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