Investor Confidence Index suffers biggest fall since May 2012/ Private investors are particularly worried about the next 6 months. Their longer term outlook for UK shares is still positive/ European shares go from basket case to investment case. US confidence wanes. Is the UK market expensive? By Laith Khalaf, Senior Analyst, Hargreaves Lansdown.
The general election has given investors a bad case of the jitters, though they remain pretty sanguine about the longer term prospects for the UK stock market. This looks like a sensible view; the election can certainly influence short term market sentiment, but it is unlikely to significantly affect the aggregate earnings of UK companies. So while the election may cause some bumpiness in coming months, in three years’ time it won’t still be driving stock prices. Even now there are broader themes influencing the Footsie. The fall in commodity prices is still creating volatility in oil and mining stocks, lower fuel and energy prices are feeding through into sales for consumer-facing companies, and low interest rates continue to make shares look attractive by default, helping to push the UK stock market to new highs.
Meanwhile European shares have gone from basket case to investment case in the eyes of private investors. Investor confidence has responded to the Quantitative Easing programme introduced by the European Central Bank, alongside economic data which show some small signs of improvement in the region.’ The Hargreaves Lansdown Investor Confidence Index fell 11 percent this month, the biggest monthly fall since May 2012, when the Greek debt crisis threatened to break up the Eurozone, and the Footsie fell by almost 10 percent in a matter of weeks. The recent fall in confidence is entirely down to investors’ short term market expectations. On a six month view of the stock market, investors’ confidence has taken a nosedive. On a one and three year view however, confidence is almost unchanged from last month.
There really can be only one explanation for such a big fall in short term confidence – the forthcoming general election, though the Footsie breaching new highs may also have given investors pause for thought. There is no doubt that the election has the capacity to dent market sentiment, and the slump in the confidence of private investors reflects that. In the long term however, the UK stock market will be driven by company profits, which are not in thrall to any political party. Again, this fact is reflected in the longer term market outlook of private investors.
The UK stock market is packed to the rafters with global companies. 22 of the FTSE 100 actually report their earnings in dollars, another five report in euros*. Around two thirds to three quarters of Footsie revenues are estimated to come from overseas. The decision by OPEC last year to maintain oil production in the face of slowing demand has wiped around £80 billion off the Footsie’s oil and gas sector. Meanwhile it has cut the cost of fuel and energy, giving a shot in the arm to companies which rely on consumer spending.
This all serves to highlight that events on the global stage are the real drivers of our stock market; in this context the UK election is rather parochial by comparison.
The Hargreaves Lansdown Investor Confidence Index now stands at 94, down 11 percent from last month’s reading of 106, and below its long term average of 101. On a one and three year view, investors are still relatively optimistic, with 64 percent and 77 percent expecting the stock market to rise over these periods, respectively. However on a six month view there has been a significant fall in confidence. Now just 36 percent of investors expect the stock market to be higher in six months’ time, compared to last month’s reading of 47 percent, and a long term average of 49 percent. European shares have seen a surge of support from private investors in recent months, rising from a confidence score of 50 to a confidence score of 68 in three months, as investors welcome the can of Greek debt being kicked further down the road, and the one trillion euro Quantitative Easing programme introduced by the European Central Bank. Just three years ago, European shares were pretty much written off as a basket case by investors, managing a confidence score of just 29.
(Our confidence score for overseas stock markets ranges from 0 – 100, with a score above 50 signifying a positive outlook for the next 12 months). Meanwhile investor confidence in the US is still strong, but waning. US shares have fallen from a confidence score of 74 to 66 in the last three months. Notwithstanding the short term gyrations caused by UK election, what about the longer term prospects for the UK stock market? If you look at the Price/Earnings Ratio, a measure of market confidence, the UK stock market looks slightly overvalued, with a P/E of 17.5 compared to a long term average of 14. On the other hand if you look at the Cyclically Adjusted Price/Earnings (CAPE) ratio, a measure which smooths out spikes and troughs in company earnings by analysing the last 10 years, the UK stock market looks slightly undervalued, currently trading at a CAPE ratio of 15.4 compared to a long term average of 19.6.
Overall the UK stock market is in what we would call ‘no man’s land’. In other words it is neither obviously cheap, nor obviously expensive. It does however look cheap next to the US market. The ‘Shiller P/E’, which is similar to CAPE, currently stands at 27.3. Apart from a brief flirtation with this level in 2004, this measure has only been higher during three distinct periods in the last century – in the summer of 2007, from 1996 through to 2001, and in 1929.
Investors should focus on their long term savings goals and try to shut out short term noise like the UK election. If you try to time the market you are just as likely to get it wrong as right. The risk in putting off starting an investment plan is you never get round to it, so if you have decided to do something, it’s probably best to just get on and do it. The golden rule is of course to make sure as much of your savings as possible are protected from the taxman, by using your ISA and pension allowances.