Are soar­ing stock mar­kets a good sign?

It is great to make money; just don’t as­sume the good times will last for­ever

Shares - - EDITOR’S VIEW -

The S&P in­dex in the US is up nearly 270% since March 2009, mak­ing the cur­rent bull mar­ket the sec­ond strong­est since World War 2, ac­cord­ing to anal­y­sis by LPL Re­search.

Stock mar­kets in other parts of the world are also thriv­ing. The DAX Xe­tra in Ger­many is up by more than 200% since 1 March 2009, ac­cord­ing to SharePad.

Over the same time pe­riod, In­dia’s BSE 100 has risen by 160%; Hong Kong’s Hang Seng is 115% ahead; and The Rus­sian Trad­ing Sys­tem in­dex is up 107%. In the UK, the FTSE 100 has ap­pre­ci­ated by more than 90% over those eight and a half years.

Against that pos­i­tive back­drop, some pro­fes­sional in­vestors are in­creas­ingly wor­ried about the sus­tain­abil­ity of the mar­ket, say­ing we are long over­due a mar­ket pull­back.

The bull run is cen­tral to this week’s edi­tion of Shares. While we aren’t call­ing the top of the mar­ket, we are high­light­ing the im­por­tance of reeval­u­at­ing your port­fo­lio so as to be fully pre­pared once the mar­ket cor­rec­tion does hap­pen. DON’T SIT BACK AND RE­LAX Mar­kets don’t stay in an up­wards di­rec­tion for­ever. His­tory tells us they move up and down.

There are plenty of rea­sons to sug­gest the mar­ket could even­tu­ally run out of steam. Mon­e­tary stim­u­lus is be­ing with­drawn (al­beit slowly); consumer debt is high in the UK and US; and eq­uity val­u­a­tions are high.

Mon­e­tary stim­u­lus boosted as­set val­u­a­tions so tak­ing it away might lead to lower as­set val­ues in­clud­ing stocks and shares. High lev­els of debt raise the risk of eco­nomic weak­ness if con­sumers can­not re­pay their bor­row­ings; which in turn damp­ens prospects for a wide range of busi­nesses.

On the third point, high eq­uity val­ues im­ply lower re­turns in the fu­ture. Only savvy in­vestors will emerge vic­to­ri­ous. They are the ones who sell their highly rates stocks to oth­ers who may not re­alise they are over-pay­ing. The savvy in­vestor will then sit and wait for the mar­ket to be­come cheaper.

Your cur­rent fo­cus should be on pro­tect­ing the wealth you’ve ac­cu­mu­lated dur­ing the bull run. How­ever, it is im­por­tant to stress this does NOT in­volve sell­ing ALL your in­vest­ments.

It is im­pos­si­ble to ac­cu­rately time the mar­ket. Some of the best re­turns have typ­i­cally come in the late stages of a bull mar­ket. You not only need to stay in­vested dur­ing this pe­riod; you also need to main­tain eq­uity ex­po­sure dur­ing bad times as you won’t want to miss the re­cov­ery which can be rapid and re­ward­ing.

Reg­u­lar in­vest­ing dur­ing mar­ket down­turns al­lows you to buy as­sets at a cheaper price. We’d fo­cus on com­pa­nies with strong lev­els of free cash flow and high re­turn on the money they rein­vest back in their busi­ness.

BUILD UP A CASH PILE

Now might be a good time to trim prof­its in the high­est val­ued stocks in your port­fo­lio. You would crys­tallise some of your gains and gen­er­ate cash to go bar­gain hunt­ing should mar­kets start to pull back in the near fu­ture.

In 20 July is­sue of Shares we warned some fund man­agers had started to get out of many high­growth, high-value stocks – and it seems the wider mar­ket has now be­gun to do the same. Just look at share price weak­ness among the likes of Fev­ertree Drinks (FEVR:AIM), Pur­ple­bricks (PURP:AIM) and Key­words Stu­dios (KWS:AIM) in re­cent weeks. (DC)

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