Stock in trade

Shares have fur­ther to go

The Daily Telegraph - Your Money - - FRONT PAGE -

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

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