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The quandary of markets, by Anthony Platts
8:00pm Tuesday 22nd January 2013 in Business
THE game of Scrabble was created by American architect Alfred Mosher Butts in 1938, based on a variation of his earlier word game called Lexiko, writes Anthony Platts.
If you were to come up with the word quandary, you would score a mighty 21 points, before any double letter scores, triple letter scores, double word scores or triple word scores; let alone a bonus for more than seven tiles laid on the board in one turn.
Many word plays can be made of the term quandary. By definition, it is a state of perplexity or uncertainty over what to do in a difficult situation. The origin of the word is thought to be late 16th century, partly derived from the Latin quando, meaning when.
The word on the street is that there is a wall of money being, and about to be, invested in equities or shares. The bulk of this money derives from a switch out of bond markets into equity markets.
Measured fund inflows over recent months show that towards the end of 2012, the tide had turned, whereby inflows to bonds no longer exceeded the inflows to equities.
A quandary or dilemma is the issue of whether equity markets are cheap or not.
Many people cling to a comparison to the all time high for the UK market at the end of 1999. On that view, the current capital value of the FTSE 100, for example, has fallen by around 11 per cent; supporting a claim the market is cheap.
Ever since the end of 2009, detractors of investing in shares have been keen to use a ten year view, but using the all time high of December 1999 to December 2009. This showed a fall in capital value of the FTSE 100 of 21.9 per cent.
We are now more than three years on from that stale ten year view, using those start and end points, so what about a more accurate ten year view.
The FTSE 100 from the end of 2002 to the end of 2012 shows a capital increase of 49.7 per cent, and this return does not include the payment of dividends over a ten year period.
An even more impressive ten year view of performance is likely to be seen on 12 March this year. Should the FTSE 100 be at a similar level then, as it is now, this would show a capital return of around 87 per cent.
So, the conclusion on whether or not the market is cheap or not clearly depends upon your starting point.
Ultimately, a market consists of buyers and sellers and prices are determined by what people are prepared to buy at and what prices people are prepared to sell at. In most cases, on the part of the seller, it depends upon the price originally bought.
On a simplistic basis, if there are more buyers than sellers, then a price goes up. If the aforementioned wall of money is waiting to be invested, this would indicate higher values. Certainly, cash returns are still poor for the foreseeable future.
A more sophisticated view is that taken by an investment manager. There are sectors within markets that are cheap and there are sectors within markets that are expensive. Within those sectors, there are shares that are cheap and there are shares that are expensive.
Anthony Platts is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Divisional Director in the Teesside office of Brewin Dolphin, and can be contacted on 01642 608855.
Past performance is not a guide to future performance. The value of investments can fall and you may get back less than you invested. No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.
The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.