Start of an equity bull market?

As we approach the end of the year and the FTSE 100 continues to rest below the psychologically important 6,000 points level, one fund manager is calling the start of an equity bull market.

Richard Buxton from Schroders says we are in the “foothills of a new bull market”, with starting valuations rather than the economic outlook driving future returns.

Buxton has some form when it comes to these sorts of predictions.

Back in 2002 he predicted that equity markets would go sideways for a time, which has proven largely accurate over the past decade; total return from the FTSE 100 over the past ten years has largely come from dividends.

Buxton explains that the current p/e multiple of 11 times should mean the next ten years offers positive real returns for investors, possibly with double digit returns each year.

This is despite the economic challenges currently faced by the UK.

Not entirely bullish, Buxton also points to the three risks next year of the US fiscal cliff, a ‘hard landing’ in China and the ever present troubles in Europe.

Could this be the start of a prolonged equity bull market?

Current valuations certainly suggest there is value to be had for equity investors.

Assuming the markets get past the three main risks identified by Buxton, and avoid any other currently unforeseen risks, then 2013 could represent a very good year for equity investors.

But making predictions like this is risky in itself.

Backing a single asset class is usually too high risk for investors, who are instead better served by investing in a diversified portfolio across the main asset classes.

Any confidence in a single asset class – such as equities – might be reflected in a diversified portfolio through tactical adjustments to the strategic asset allocation, rather than a sizeable bet on the performance of the FTSE 100 in a single year.

As we approach the end of the year and consider our own market outlook for 2013 and beyond, we will take the views of Richard Buxton (and others) into account before deciding how our clients are best allocated for the year ahead.

Photo credit: Flickr/A. Sparrow