When the last bear turns bullish is it time to get out?

published 15 May 2006

"When the last bear turns bullish, it's time to get out," says Nils Pratley in The Guardian, referring to the revelation that Stephen Roach, Morgan Stanley's famously gloomy chief economist, suddenly has a spring in his step.

"I am now feeling better about the prognosis for the world economy for the first time in ages," says Roach in his latest research note. After several years of dire warnings about global trade imbalances and the US current-account deficit, signs that central banks are adjusting liquidity and the IMF and G7 are serious about tackling imbalances have won him round to a semi-bullish position. But not everyone is encouraged by this sudden conversion. "You have to admire the bravery of the call, given that Roach admits the last time he was so optimistic was 1999," says Pratley.

But while Roach may have been the biggest bear in the woods, there are still plenty of others around. Anthony Bolton of Fidelity's Special Situations fund emerged as one last week, revealing that he has bought a three-month put option allowing him to sell a large proportion of his holdings at a pre-arranged price, and has also cut borrowings from the usual 15-20% of shareholders funds to 11.5%. "The bull market in the UK has now entered its final stage," he says, with fewer companies meeting the criteria for inclusion in his fund.

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It's certainly hard to find value in UK shares, says Patrick Hosking in The Times. While average p/e ratios in the FTSE 100 are at their lowest for ten years, they "are low for good reasons at this stage of the economic cycle, with interest rates rising and growth slowing". And the index has a higher-than-usual weighting towards historically lowly rated sectors such as banks and miners.

Despite this, Hosking thinks that decent yields mean the overall UK market does not look overvalued, although further progress will be harder to come by. The US is a different matter, says John Maudlin on Frontlinethoughts.com. He argues that there is a 13-year cycle in valuations, taking the market from undervalued to overvalued and back again. By historical standards, valuations are still so high that the expected return over ten years is zero.