Risk leads to stock rises

29-April 2009 | By Michael Vassallo

The government is planning to saddle the country with unprecedented levels of debt and we are all going to pay for it for many years to come through higher taxes and eventually lower public spending.

While the government pledged aid for the job market, it seems more interested in keeping people in training and education to mask rising unemployment figures than in actually creating jobs. There was a distinct lack of any significant fiscal stimulus and the outlook for job creation still looks poor.

But despite the doom and gloom in the economy the stock market has continued to rally in the last few days since the budget announcement. In fact, the market seems to be totally disregarding the Chancellor. There is a growing feeling on the markets that we may have reached the bottom and investors are now looking for positive returns. Indeed, since 6 March the FTSE all share has risen by 16%.

Much of the recent market performance has come from a switch to cyclicals. Many investors are looking for more risk and greater upside. This
has been reflected by the performance of Hays, Michael Page and SThree, which have all risen strongly in the past two weeks. Many fund
managers are benchmarked against quarterly performance figures and therefore if there is strong momentum in a sector or investment class (ie
cyclicals), then they need to be a part of it to keep up their fund’s performance. This is part of the reason why the recruiters seem to be rallying much earlier than I originally expected. As Spring’s interim management statement confirmed this week, permanent business fell dramatically in the last quarter, with net fee income in their perm business falling by 41% and tracking the market. Negative news flow like this is likely to persist for many months to come while if investors continue to increase their appetite for risk, share prices in the sector could continue to improve.

• Michael Vassallo, assistant director, equity research, Brewin Dolphin Investment Banking