THE stock market has reached (another) crucial point. The rapid recovery since March has had a few setbacks on the way, but generally has powered ahead as confidence increases.
Two weeks ago, I wrote about the wall of worry versus the wall of money. The wall of worry saw the FTSE drop below the 5,000 level at the start of October, only for the wall of money to push it back within days.
Buyers flooded into the market, taking advantage of the panic selling to pick up shares at cheaper prices.
There is still a lot of money waiting to be invested. For some, having missed the bottom of the market, any short-term setback represents a buying opportunity.
It is clear that interest rates are set to stay low for some considerable time, so cash investment is unlikely to keep pace with inflation, meaning investment in risk assets, such as shares, is a better option. There are a couple of catalysts to determine the next movements of the market.
The third quarter reporting season is under way in the US, whereby US companies provide trading updates. While results are expected to be better than the second quarter, the reasons for better figures will be analysed in depth.
Markets will be looking for not only lower costs boosting profits, but an increase in revenues.
The latter would lead to further gains, but any deterioration in revenues could provide a further setback.
The situation regarding the two UK banks, where the Treasury are significant shareholders, in the guise of UK Financial Investments, is intriguing to say the least.
The Government’s finances are in such a mess that any chance of them getting their investment back, even better at a profit, should surely make sense.
Their predicament, just like any other shareholder, is not helped by the Financial Services Authority.
There is a push from one side to raise capital levels, which is harmful for the share prices, and the quandary for the Government is whether to invest further money in the banks.
Taking up further shares significantly increases their chances of making a sizeable profit in the long run. Is it politically palatable for the Government to invest further funds? A failure to do so, though, would see their chances of a good profit diminish.
The asset protection scheme, negotiated in March, at the height of the financial crisis, is no longer required; at least not to the levels discussed at the time.
Since March, the banks have seen their level of impaired loans improve dramatically. It is arguable that the asset protection scheme is not needed at all.
Should it be implemented, the capital levels of the banks would be far higher than necessary. Statements that the banks are not lending are simply untrue.
An example where the banks are continuing to lend is commercial property.
Often, this is a case of refinancing existing borrowings, but these loans are the so-called toxic debt that any asset protection scheme would seek to ringfence.
Commercial property values are rising rapidly from declines of about 45 per cent in the past two years.
The rental yields and the decline in value of the pound make commercial property a steal for foreign investors.
A reversal of the financial crisis is happening; property values up, toxic property debt down, bank profits up, shareholder gains.
The glass is half-full.
■ Anthony Platts is a divisional director in the Teesside office of Brewin Dolphin, and can be contacted on 0845-213-1340. All prices quoted in the article are from public sources. The views expressed are not necessarily held throughout the Brewin Dolphin Group. You should bear in mind that no investment is suitable for all circumstances and it is important to seek expert advice if in any doubt.
Brewin Dolphin Limited is a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority.
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