The UK equity explosion: Safer than it may appear

THE FTSE posted another day of gains yesterday, continuing what has been a resiliently bullish trend. And while it is probable that we will see a plateauing of the stock rally this week, or even some retracement, the trend is likely to remain intact. This may not be a stock picker’s market, but the global equities surge is not going to go away any time soon.

In the last six months, the FTSE has gained 11.7 per cent. And over the same period, the US S&P 500 has added 9.3 per cent. This rise is surprising given the sluggish domestic conditions on both sides of the Atlantic, as well as a continuing European crisis that ought to be denting investor confidence. But though equities markets shouldn’t be attracting such inflows, investors currently have a distinct lack of options in their hunt for alpha.

Central banks are still pumping massive amounts of cheap money into the markets – the Federal Reserve’s open-ended quantitative easing programme is injecting $85bn (£54.1bn) every month. And that liquidity has to go somewhere. But with fears of a bond bubble, equities are viewed by many as the only market able to soak up this liquidity.

GLOBAL EXPOSURE
That isn’t to say that there haven’t been some mis-fires along the way – notably from retailers with a large exposure to the domestic market. But though it is a UK-based exchange, the benchmark FTSE 100 index is heavily weighted with financials and miners – the kind of companies with a broad global exposure, and not solely at the mercy of the British high street spender. And it is these companies that have benefited the most from loose monetary conditions and other global macro dynamics.

So how long can this market run? Nobody truly believes that this rally will not come thumping back down to earth. It has been fuelled by cheap artificial money and, at some point, that money is going to become baseless. But there is no reason why investors cannot enjoy the ride until then.

And many signs point to there being plenty more life in this bull run yet. As the year rolls on, it is likely that we will be hearing more about the great rotation. As market volatility falls to lower pre-crash levels, the view is that investors – both retail and institutional – will roll out of the safety of cash positions and back into equities and other risk assets. It has been on the edge of the investment conversation for the past 18 months. But last week, Bank of America Merrill Lynch chief investment strategist Michael Hartnett touted 2013 as the year the great rotation will finally arrive, and it is likely that there will be many to follow in his wake.

There, of course, exists the threat that a black swan event could cause the stock market to blow up. But a hedged and diversified exposure should allow investors to continue to get some bang from the equities market into the second quarter of 2013 and beyond.