The need for returns is still driving investors into equities

MARKETS finally saw a sell off this week, as investors decided that discretion was possibly the better part of valour, and concluded that booking profits might be the thing to do.

On the basis that nobody ever got sacked for taking a profit, it is understandable that funds, which have generally had a tough time over the last few years, might want to lock in some of their good fortune before it disappears. That said, even after the reversal, the market is up over 6 per cent on the year to date. But investors might note that there are over 40 FTSE 100 index dividends due to go “ex” over the next month, and we may see some lightening of positions once payment dates have passed.

Overall, the question on everyone’s lips is whether the rally can really take hold and continue through 2013. It is always hard for markets to continue higher, day after day, as the psychological pressure builds on new entrants to avoid being the person who “buys the high”. Little market corrections, therefore, are meat and drink to those looking for a pull back to get in.

Underlying the moves is the need for return. Dividend yields for blue chip stocks are still over 4 per cent, which looks fantastic against returns on cash or bonds. It is also a simple fact that the Bank of England is unlikely to move rates aggressively higher for a good many years to come.

UK stocks have performed quite poorly over recent years against most of their international counterparts. A compounding effect has been the general weakness of the pound, which has not helped one jot. As a stark reminder of the global effects of currency moves, a UK investor in the German DAX would hardly have noticed any bear market at all. Even if he or she had bought at the highs of 2007, German euro holdings in sterling terms would still be up nearly 20 per cent. Compare this to a German investor in the UK who, over the same time period, would still be staring at a 25 per cent loss even after the rallies of the last few years.

What is curious is the oft-stated fact that most of the senior stocks in the FTSE are not UK focused at all. It is generally agreed that over 70 per cent of FTSE 100 business is actually overseas. You would have thought that a weak pound would have been good for UK stock prices. These are some of the reasons why advisers have been getting increasingly positive about the UK equity markets.

Unfortunately, all of the best intentions do not help if the market decides to go on one of its regular walkabouts. Every year, there seems to be a period when confidence flies out of the window. Last year it happened around May, 2011 ran into summer blues in August, and in 2010 it was May again. February has its fair share of “moments” (2007, 2008 and 2009 come to mind). But it is fair to say that most of our clients are ignoring any thoughts of negativity and are buying into any weakness. Time will tell if they are right.

It is true that the actual economic data has been pretty grim recently, although markets have generally ignored this. Investors playing on the long side will be hoping that this effect will continue until such time as the numbers turn prettier.

Simon Denham is chief executive of Capital Spreads. You can follow him on Twitter @DenhamSimon

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