Hobson: Buy When the FTSE Dips

THE WEEK: The heavy volatility, with the FTSE 100 hitting a new low for the year below 6,200 points, followed by a surge above 6,500, looks like madness - but creates opportunities

Rodney Hobson 19 December, 2014 | 12:46PM
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December’s stock market trading has had all the wheeler dealing shenanigans of Peckham market, but to borrow a phrase from Del Boy in Only Fools and Horses, you know it makes sense. Well, sort of.

The heavy volatility, with the FTSE 100 hitting a new low for the year below 6,200 points, even lower than the mid-October dip, followed by a surge above 6,500, looks like madness and in some ways it has been. Not a lot has happened to justify such extreme movements.

It is true that oil-related stocks have been battered by the falling crude price but the rest of the economy benefits, especially retailers who see their distribution costs tumbling. With pressure on prices in the shops, that takes a bit of the squeeze out of the equation in the High Street. Yet the whole market fell for six consecutive days in which the Footsie lost more than 400 points.

What was particularly disconcerting during this severe bear phase was that each rally during the trading day soon petered out. There was no follow through to keep the momentum going.

Yet one can make similar, though opposing, remarks about the violent upward swing this week. There has been no surprise news to reassure market, no resolving of the problems that so worried investors just a few days previously. Suddenly, it was the sellers who lost their nerve each time the market faltered.

The excuse that the Fed will not raise interest rates as soon as expected just doesn’t wash. How can replacing the phrase “considerable time” with the word “patience” be regarded as a signal that the Fed has become more dovish? The idea is preposterous.

Similarly, the assurance by Fed chair Janet Yellen that “this new language does not represent a change in our policy intentions” should be taken at face value. Amazingly, commentators decided that Yellen meant the opposite and that policy had somehow changed.

The point is that despite the excessive swings, the London stock market has been moving sideways all year – and has done so in December. Ditto New York. Many commentators bemoan the proliferation of computer trading, which tends to exaggerate these oscillations. I welcome the great opportunities that are created to buy at the bottom and to sell at the top of these mini-cycles.

It takes a great deal of nerve but if you are in for the long term, as I am, don’t panic. Shares represent the best investment and there will be recurring opportunities to buy on the dips.

Will the Taxpayer Get a Good Price for Lloyds Shares?

Chancellor George Osborne has signalled that the Government – aka the taxpayer – will part with another dollop of shares in Lloyds (LLOY), the bank rescued by the state after being wrecked by the takeover of HBOS.

This is certainly good news for taxpayers and the price will be set by the market and not by advisers who are more interested in making money for themselves than in getting the best return for the state.

Is this good or bad news for shareholders? Bad for the short term, because every time the share price rises the Government will sell and drive the price back down again. This process will last for just over six months, so that will put a dampener on Lloyds shares right through the first half of 2015. Those who cannot wait that long may prefer to sell, and Lloyds shares have held up remarkably well since the announcement so that opportunity is still there.

However, for the longer term this is excellent news, reflecting the considerable progress that Lloyds has made. Profits are edging higher and the dividend is coming back. The more the overhang of shares is whittled away, the less we have to worry about the Government dumping shares in the future. I shall be retaining my modest stake.

Back in the New Year

This is my last column for 2014. I wish all readers a Happy Christmas and a prosperous New Year. The column returns on January 9, when I shall be a year older and, I hope, wiser.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Lloyds Banking Group PLC51.75 GBX-2.32Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.