What a year we have had in 2011. The year began relatively calmly. After strong recovery in 2009 and 2010, we saw stockmarkets trade relatively flat in the first half of the year, managing to ride out global disasters like the Japanese earthquake and Tsunami.
Then in July, we saw the Republicans and Democrats pushing the US to the brink with regards to raising their debt ceiling. It was inevitable that this was always going to be resolved, yet in typical politician style, they managed to have this portrayed like a circus in the media. This was the start of investor nervousness.
Throughout the summer, rumours then started about the Greek debt and these came to a head in August when we saw the FTSE 100 drop from about 6,000 points to a little over 4,900, a drop of almost 20%. Since then I don’t think there has been a single day when the Euro debt crisis hasn’t been in the news. We saw a brief recovery in markets with the FTSE 100 rallying to 5,700 when the Greek bailout was announced, only for politicians to start playing mind games again when the Greek PM announced a referendum. This was never going to be allowed by the Euro leaders but still it destroyed any confidence in the markets.
Soon after this the problems spread to Italy and Spain. We have now seen changes in political leaders and governments in Greece, Italy and Spain. Each have announced austerity measures and we have had various Euro summits to try and address the issues.
The problems are still there with lower growth forecasts, even possible recessionary dips next year. We have also seen David Cameron attempt to protect Britain’s interest by refusing to sign up to the Euro deal, although Euro leaders have tried to push on ahead. Since this, other countries are now starting to question some parts of the agreement. This week we have seen a £407 billion emergency aid for European banks, the biggest ever funding scheme and one that was far larger than anyone expected.
We have seen companies survive the first credit crunch and those same companies have cut costs and turned into leaner, meaner and potentially more profitable businesses. In fact we have seen many companies beating market expectations regarding their profits this year. Therefore, there are companies out there, which fund managers can invest in which can still provide a return for investors. Additionally, the UK stockmarket is currently trading on a modest 9.2 price to earnings ratio, based on estimated 2012 earnings. This represents significant value when compared to the long term average of 15.
Over the last 10 years we have seen virtually no capital return from UK equities. However, the starting point is the key to any future growth. Ten years ago the P/E ratio was 24, as this had been horrendously inflated in the dot com boom. If we are starting 2012 with a ratio of 9.2 then companies represent considerably better value for money for the long term investor. With globalisation we have seen the link between the economic backdrop and stock market performance weaken. Companies listed on the FTSE 100 now achieve the majority of their profits from overseas and therefore it is the starting valuation of the stocks which will drive returns more so than the economic backdrop.
Let’s hope we see the Euro crisis sorted in the first half of the year and we can then see the true value of markets come into play. As I have said we have already seen a hint of that when the Greek bailout was announced, US markets that month had their best return since the 1970’s.
For your information, our office will close at 1pm on Friday 23rd December and will reopen on Tuesday 3rd January 2012. During this Christmas period you can keep in touch with us via our website at www.censusfinancial.co.uk, by visiting our Facebook page or by following us on Twitter @CensusFinancial.
All of the staff here at Census Financial Planning would like to take this opportunity to wish our clients and professional connections a very Merry Christmas and a happy New Year. We look forward to speaking with you in 2012.
In case you missed our Christmas card please click here.
Chartered Financial Planning
# # #
Census Financial Planning is an independent financial planning practice providing a professional and comprehensive financial planning service, located on the Lisburn Road in Belfast, Northern Ireland.