Are you a market pessimist or optimist?

Jeff Prestridge

Jeff Prestridge

Where are world stock markets heading?

It is a question occupying the minds of investment commentators as markets continue their inexorable rise against a backdrop of historically low interest rates and, in the UK at least, an improving economy.

It is a question given more urgency by investors’ unsated appetite for equities. Capita Asset Services, registrar to many leading UK companies, has just released a report indicating holdings of UK equities among private investors are at a post-2008 financial crisis high (just short of £239bn), with most seeking the elixir that is dividend income.

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Over the past seven years, said Capita, private investors have reaped an “astonishing” (Capita’s word) £58.3bn in dividends. By the time the year is out, private investors will have received UK dividends in 2014 totalling a record £11.3bn.

Furthermore, said Capita, by the year-end the value of private shareholdings will have eclipsed the record reached in May 2007. If only Margaret Thatcher was around to hear such cheer.

Capita’s analysis confirms earlier data from the Investment Management Association that showed net retail sales of investment funds in April were just short of £3bn, compared with £2bn in the same month last year. Surprise, surprise: sales were dominated by UK equity income funds.

Against this backdrop – although there is no consensus among experts – the stock market pessimists are beginning to bubble to the surface. They believe the good times cannot continue.

In recent weeks, Jason Hollands, managing director of London-based adviser Bestinvest, has talked about the “calm before storm”, stating: “While none of us has a crystal ball to predict the short-term pattern of markets, gut instinct tells me that when markets are high, compelling valuations are absent across most asset classes and retail fund flows have soared, it is time to be a little more cautious.”

He is not a lone voice. Brian Dennehy, managing director of FundExpert, refers to “dangerous times” and the need for investors to “better understand the risks and have a clear idea of the downside”. To ensure his message is not misunderstood, he supports his comments with a quote from Aldous Huxley: “Facts do not cease to exist because they are ignored”.

London & Capital Asset Management, a global wealth and asset management company based in London, is also urging caution. It said six big risks overhang world stock markets: overstretched asset prices; the possibility of a “disorderly” market reaction to a further reduction in quantitative easing in the US; disappointing global economic growth; further crises in emerging markets, especially in China with the reduction in credit growth; deflationary dangers in Europe; and geopolitical risks, be it in Ukraine or the Middle East.

In light of such “risks” the company believes investors should “remain alert” and recommends “some weight to cash as a safety cushion in the coming months”.