Stock in trade
Shares have further to go
British shares marched confidently upwards at the beginning of the year but since then they have quietly relapsed.
It’s a bit disappointing but probably just a normal fluctuation. After all, the FTSE 100 has had a terrific run since last June, rising from 6,000 to a peak of more than 7,300 last month. It is not surprising that it should take a rest.
I have been wondering about the potential for the market to keep rising. I am fully invested and frankly I have been hoping for some encouragement that I am on the right track.
Thankfully, I have found it. I looked at the figures given by the Investment Association for the money being invested by people in investment funds and – just as important – which kind of funds they are choosing.
The latest figures show that 2016 was the worst year for subscription to investment funds since the dark days of 2008.
This is mostly because in June people withdrew £3bn in a panic over the EU referendum. But after this rush for the exits, gradually and increasingly, people have been returning.
December was the best month of the year for new investment. In other words, private investors in funds have been coming back and they should have quite a bit of ammunition in their arsenals after being so cautious in 2016.
Now let’s look at which funds they chose to invest in. The overwhelming favourite last year was the “targeted absolute return” category.
These funds aim to give investors a positive return each year, regardless of whether shares go up or down. Individual funds vary enormously in what they hold but they have to take a cautious view of shares in order to have a good chance of always making a profit.
Last year showed the result of this approach. Yes, the targeted absolute return funds have made, on average, profit. But it was a mere 2pc, whereas the FTSE 100 index returned more than 14pc, without counting the dividends.
Meanwhile, funds invested entirely in shares were completely out of favour. People actually withdrew £8bn from them – and British shares were particularly unwanted.
So I think there is a great potential for two things to happen. First, I think people will come back to investing in general. Second, I think people will increasingly recover their confidence and go back to shares.
I have to admit that I expect another thing to happen which, as a general rule, is bad for the market. I think that interest rates may be increased.
Yes, I know that the Bank of England’s Governor, Mark Carney, has said that he will be reluctant to raise interest rates even if inflation goes above the Bank’s target of 2pc. But his predictions thus far have proved remarkably bad. If inflation goes over his legal target, it would be bizarre for the Bank not to make at least a small increase in interest rates.
Although this is not good for shares in theory, I still think they will continue their upward trend this year because there is plenty of leeway. The dividend yield on the FTSE 100 is 3.7pc – far above Bank Rate of 0.25pc. Moreover, dividends are currently increasing healthily.
If there is a rise in interest rates it will also benefit the banks, which will be able to earn more money on their cash balances. Lloyds Banking Group is my biggest holding and I am hoping that a rise in interest rates will improve the dismal performance of its shares over the past 12 months.
I am also encouraged that this week the Government announced that its stake in Lloyds had now fallen below 5pc. The last of its shares could be sold before the summer. The removal of this overhang could lead to a Lloyds Bank bounce.
As for new share purchases, I have been adding to an old holding in Communisis, a company that organises mailshots for other firms.
It has been through a difficult time but seems to be recovering. It has recently won some good contracts from HMRevenue & Customs and Sony.
The shares, at 46.5p as I write, stand at just over seven times forecast earnings. It is also encouraging that the three-year downward trend of the share price looks as though it has been reversed.
In fact, the chart has made a shape known as a “double bottom”. In this context, a “double bottom” is an excellent thing.
‘Funds invested in shares were completely out of favour’
An interest rate rise from the Bank of England could give a boost to Lloyds Banking Group shares