(MENAFN- ProactiveInvestors - UK) It has been a choppy start to 2014 as investors digest mixed US data and the start of the fourth quarter earnings season.
Disappointing US non-farm payroll data fuelled uncertainty over the strength of the US job market, triggering the biggest one-day drop for the S&P 500 for two months. Last Friday's payrolls showed the US economy added 74,000 jobs in December, the slowest pace of job creation for three years and well below the 196,000 new jobs expected. Following a string of upbeat data, some economists attributed the weak report to adverse weather conditions.
Encouraging increases in core retail sales, business inventories and an improvement in business activity in the New York region, helped rekindle optimism about the US economic outlook. US retail sales rose 0.2% in December, beating expectations for a 0.1% increase, according to The Commerce Department.
Meanwhile, wholesale inventories, a key component of gross domestic product, gained 0.4% after rising 0.8% in October. Economists had forecast a rise of 0.3% in November, causing many analysts to increase their GDP estimates for the fourth quarter. In New York, the Federal Reserve said that its Empire State index rose to 12.51 in January, the highest since May 2012, with strong readings for both new orders and employment components.
The reaction to this week's data has been interesting, wherein strong US numbers are not impinging on risk appetite, despite implying a continuation of quantitative easing. The change in perception helps reduce one of the major headwinds the market was facing in 2014, as other central banks continue to withdraw support.
The US fourth quarter earnings season kicked off last week with Alcoa, the aluminium giant, falling short of expectations. Strong results from the financials, however, helped propel the S&P 500 to fresh all-time highs, after Bank of America Corp, JPMorgan Chase and Wells Fargo posted strong earnings updates. The World Bank added to the upbeat mood late on Tuesday after it raised its forecast for global growth for the first time in three years
Technical analysis of the FTSE 100 illustrates the recent strength with the blue-chip index rallying over 400 points in the past four weeks. The 13-year highs at 6844 are seen as a clear resistance level, while support is likely at 6770, 6690 and 6630. The oscillators are trending higher illustrating the increase in buying momentum and still have some way to go before becoming acutely overbought, suggesting the resistance could be tested before profit taking occurs
In conclusion, improving consumer confidence and strong data from the US, combined with investors revised perceptions of tapering bodes well for further growth in equities during 2014. Following a period of stagnation, the global economy is entering a phase of actual economic expansion, which the bears would argue could mean equities will run out of steam.
For the past 50 years, bull markets have averaged a 54-month duration; this one is approaching 60 months and some fear valuations look stretched. The Vix volatility index and the 10-day average of the S&P 500 put/call ratio is at its lowest in three years, suggesting an element of complacency is creeping into investors psyche. With the FTSE 100 chart nearing acutely overbought territory and nearing major resistance, my short-term inclination is one of caution.
The real estate sector has been one of the main beneficiaries of the recent strength, with house builders and commercial property companies among the biggest gainers over recent months. With rising mortgage rates, however, signs of overheating in the London property market are visible, leading Mark Carney, the Bank of England Governor, to consider ways to cool the sector, as many valuations are starting to look stretched.
The highly anticipated onset of monetary tapering in the US has triggered a major shift in the fundamental pillars that underpin the property market. A reduction in quantitative easing marks a change in policy direction, from the ultra-loose monetary policy of late, to that of rising interest rates being inevitable before long.
Credit markets have already witnessed a change, with the yield on a UK 10-year gilt nearly doubling towards 3% from the lows of 1.6% in early May and mortgage rates starting to increase. This move comes after the UK 10-year gilt rate has fallen uninterrupted for almost a quarter of a century and the trend looks set to continue.
British Land (LON:BLND) is one of the most indebted real estate investment trusts listed on the UK market, with a net debt to net assets ratio of 83%, compared with the UK average of 61%. Given many of the groups leases are pre-agreed over a long period, any increase in the cost of borrowing, has an immediate impact on margins.
An increase in property values has boosted the company's net asset value (NAV), a key measure of the property firm's portfolio of assets, to 623p compared to 596p a year earlier. The even sharper rise in the shares, however, places them at a 5% premium to NAV, compared to a long-term average discount of about 11%, higher than peers Land Securities and Hammerson.
British Land currently trades on 21.7x earnings, a high rating compared to historical metrics and given earnings are only forecast to grow by 6% in 2015, it puts them on an unappealing PEG of 3.6, although the yield of 4.1% remains appealing
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