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Glass half full could suggest further gains for UK stocks

 
Michael Hewson
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New FTSE records, could signal further gains (Source: Getty)

This week we’ve seen both the FTSE100 and FTSE250 make new record highs, and while some of these gains have been down to the recent rebound in commodity prices pushing the basic resource component of both benchmark indexes higher, there still seems to be a prevailing narrative that the economic outlook is more geared to the negative than the positive.

This may well be true given that in the last few weeks investors have put aside concerns about disruption caused by trade tensions between the US and China, the US and EU, as well as geopolitical disruption in the Middle East which has helped push oil prices to their highest levels since 2014.

We’ve also had to contend with a lot of background noise with respect to the ongoing Brexit discussions, which if you believe the narrative have been at various stages of potential collapse over the past few months.

Having to contend with all of these differing factors when making an investment decision can make it extremely difficult to cut through the hyperbole and instead focus on the underlying fundamentals as well as the technical outlook for company profits and earnings.

We’ve seen a number of high profile collapses and restructurings already this year as the construction and retail sectors adapt to a changing and sometimes challenging economic environment.

While these are unfortunate in the short term they are also the normal consequence of an evolving economic cycle, as patterns of economic behaviour change and adapt to technological change or bad business practice.

Not surprisingly the media tends to focus on the negative aspects of the UK economy which can give the impression that things are a lot worse than they actually are. Q1 was disappointing in terms of economic performance, but a lot of this underperformance came about as a result of a significant contraction in the construction sector.

Looking at it from a glass half full perspective wages are on the up, employment levels are at record highs, and unemployment is at a 42-year low, which suggests we could see a pickup in Q2. On the downside there is some concern that some parts of the equity market are too expensive along with concerns about falling house prices, which appear to be confined to the most expensive areas of the market. This should not be seen as a bad thing given how ridiculously expensive some areas of the market in London and the south east are.

This would suggest that while things could undoubtedly be better they could also be a whole lot worse.

When set against this type of backdrop it could be argued that there is further upside potential for UK and European stocks which are still cheaper than their US equivalents. Given the strength of the recent rebound along with recent positive momentum, we could well see further gains for the FTSE indexes in the months ahead, but as with everything timing will be a key factor, given the losses that we've seen this week.

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