City Watch: ‘Buying on the dips’ could be a good strategy in 2014, says Charles Sylvester

Charles Sylvester of Charles Stanley & Co, Ipswich

Charles Sylvester of Charles Stanley & Co, Ipswich - Credit: Archant

It looks like a sustained UK economic upswing is underway and the housing market is in the early stages of a bubble, fuelled by Government policies and prolonged loose monetary policy.

According to the Nationwide, UK house prices rose by 8.4% in the year to December 2013 and in parts of London price rises of 25% were recorded.

In 2007, before the financial crisis, the UK base rate was 5.5% and for the last five years this interest rate has stayed at 0.5% in order to reflate the economy. Currently, this is well below the neutral rate which is defined as the level at which monetary policy is neither expansionary nor contractionary. Clearly, the authorities want to continue to stimulate the economy especially before an election.

After a five-year equity bull market, most of the “bears” have thrown in the towel and say we are in a bubble, whereas the “bulls” are hoping for analysts to increase earnings estimates.

Although economic conditions are returning to normal, the UK still has a base rate at a 300-year low. If the economy continues to strengthen there is a danger that the bank could even fall behind the interest rate curve. We believe that the UK base rate is likely to be held at 0.5% in 2014, but we expect an increase in early 2015.

With the prospect of higher interest rates, high dividend yield shares may become less attractive and we prefer companies that aren’t as sensitive to higher finance costs and offer earnings reliability. Monetary tightening could lead to a rise in market volatility and, although we expect the FTSE 100 index to move higher during 2014, buying on the dips could be a good strategy this year.

: : Charles Sylvester is an investment manager with Charles Stanley & Co in Ipswich.

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