The latest figures from the Investment Management Association have confirmed that 2013/14 was a bumper year for demand for Stocks & Shares ISAs, with full-year net sales into fund-based ISAs rocketing from £1.3 billion in the 2012/13 tax year to £2.3 billion in 2013/14.*
The name of the game in 2013/14 was a renewed love affair with equities, with sales in March a dizzying ten times higher than the same month in the previous year. Interest in developed market equities is perhaps unsurprising after the strong returns during 2013 when shares re-rated dramatically with the support of Quantitative Easing in their sails.
In our view, equities should still have the edge, but it is a time for investors to be more discerning about where they park their hard-earned cash and certainly to be more subdued in their expectations. While most markets, with the exception of the US, are not overly ‘expensive’, it is certainty the case that shares in developed markets are now firmly out of the bargain basement that they clearly were in little more than a year ago. Meanwhile the support of the US Federal Reserve’s stimulus programmes is falling away while interest rate rises lurk on the horizon in both the US and UK.
Although the UK economic data has been positive for several months now, putting a spring in the step of the Chancellor, it is important to remember that this growth has benefitted from the tailwinds of the last round of Quantitative Easing by the Bank of England in 2012 and almost £20 billion of PPI claims hitting the economy. There is also a good deal of optimism priced into parts of the UK stock market, egged on by the froth of M&A activity. One high performing fund manager recently confessed to me that the market was now in “greater fool” territory meaning that the market may continue to rise based on bullish sentiment but on the basis of fundamental valuations some stock valuations are looking stretched.
In the world beyond our own shores, economic growth across many parts of the globe is anaemic. US GDP growth scraped in at 0.1% during the first quarter of 2014, coming in well below market consensus of 1.1% and the 2.6% recorded in the fourth quarter of last year. Additionally, China, which is poised to overtake the US as the world’s largest economy, is grappling to reign in its ballooning credit bubble and its economy is decelerating markedly.
There are therefore plenty of reasons to question whether economic performance across the globe has sufficient momentum behind it to seriously propel the earnings of many companies higher in the near term and markets could struggle to make headway. The easy money phase is over for now and we are likely entering a period when picking the right stocks is going to be more important than it has been in recent years when all ships were lifted by the rising tides of money printing.