Experts warn that volatile markets loom
THE FTSE 100 is set to breach the 5,000 mark for the first time in ten months this week, but strategists warn that the rally could be misleading and that volatility lies ahead.
The benchmark index closed one per cent up at 4,908.90 on Friday – having hit a session high earlier in the day of 4,944.16. This was the highest since 6 October 2008 – driven by resources stocks and broad gains across banks and telecoms companies – and up 40 per cent since the trough of 3,529.86 on 6 March.
But market commentators said that seasonally low volumes – with many key market players on holiday – made it difficult to forecast a continued bull market.
“This period is often seen as being run by the Sorcerer’s Apprentice, in that the larger and senior traders are away and the juniors are covering. But what will the Sorcerer do on his return?” said Seven Investment Manager director Justin Urquhart-Stewart. He added that valuations may prove to be “somewhat delicate” in the face of larger trading numbers.
In addition, some institutional investors have expressed concern that the rapid recovery in share prices is incompatible with weak economic growth. But investment bank Goldman Sachs is more positive, saying that equities remain attractively valued on most measures.
“Valuation based on earnings and dividends is attractive, and relative valuations remain compelling,” said analyst Peter Oppenheimer.
“This suggests that the market is already factoring in the slow recovery that investors fear.”
Urquhart-Stewart added that many investment houses were caught out by the biggest summer rally in 25 years, and will be keen to buy into any dips and book any profits.
“We are now entering the season of storms, and there will be more volatility in September/October,” he said.