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International
Financial equity markets have been hit hard since trading resumed
after the terrible terrorist attacks in New York and Washington
on 11 September 2001.
• In
the USA the Dow Jones index dropped 14.3% last week, the
biggest loss since 1933
•
The
UK market fell 10% in the last week to its lowest level since
April 1997
• Germany is at its lowest level since
the crisis in Asia in 1997
• Japan
is at a near 18 year low
• Hong
Kong is at its lowest level since October 1997
• On
average markets had already declined 30% prior to the attack
-
rising to 35% after the
attack
• The
oil price jumped by 13% to $31 per barrel (having risen from
$10 in 1998 and reached
$40 in the lead up to the Gulf war) |
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The
crisis has come at a time when stock markets were already worrying
about global economic trends. Companies and investment analysts
were already missing their targets and having to downgrade.
We had begun to see profit warnings on a regular basis. These
together with the 'dot.com' crash meant that we were well into
an 18 month Bear Market and were facing worries that the USA
would move into a formal recession. |
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After
the recent tragic events, we now have to contend with even more
uncertainty. There has been an immediate reduction in consumer
confidence resulting in lower consumer spending. Most people
now expect an American recession and worldwide economic weakness.
However the policy response, both fiscal and monetary, will
be sizeable and should aid recovery. American interest rates
have been cut by 0.5% and Europe is following their lead. US
government spending is set to rise by $40bn over the next two
years to rebuild and boost growth. Other Central Banks are set
to follow suit. The scale and nature of the Allied military
response is an added uncertainty that the markets now have to
cope with. However, the future is always unclear and uncertain
by its very nature and it is worth remembering that the start
of Allied operations in the Gulf war marked the low point in
a stock market trough. |
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Bonds
have been the major beneficiary of the global economic slowdown.
Bonds have significantly outperformed equities over the last
year, to such an extent that the difference in returns between
the two asset classes is now at an extreme. In the UK, Europe
and Japan equities now look cheap compared to bonds, whilst
in the US they look reasonable value relative to bonds. The
dividend yield on the UK Allshare Index is now higher than the
yield on two year US Treasury Bills (for example HSBC currently
yields more on its Shares than it does on its Deposit Accounts).
Historically this would be a strong buy signal for equities. |
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Inflation
is currently low so the threat from the oil market is lower
than in past crises. If global GDP slows after the attack, the
demand for oil will fall further. On the other hand, US retaliatory
action may disrupt oil supplies and hence apply upward pressure
on the oil price. |
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Global
economic growth has been slowing since its peak in 2000. Market
participants had already become bearish about the short-term
outlook for world growth until the end of 2001. GDP growth for
2002 and beyond was expected to recover with the help of Central
Banks loosening their monetary and fiscal policy. Interest rates
are set to fall further. Inflation is low and under control.
The recovery in economic growth may have been delayed by the
recent terrible events but recovery should happen at some stage.
When markets recover they tend to do so sharply. It is very
difficult to predict exactly when this will happen. |
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Add
to all of this the difficulty of interpreting a market where
apparently bad news can be seen as good news (if worse was expected)
and we can see why 'Equity' style investments are described
as risky. But the truth is that there are few alternatives that
offer a facility for convenient accumulation of funds with the
prospect of meaningful long term growth. The AllShare Index
stood at 61 in 1974, it now stands at around 2,200. As we keep
saying, no-one knows the future, but we do know that, in the
past, no safe investment comes near this rate of return. |
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Conclusion |
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No-one
knows what will happen in the future. |
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After
a crisis and the initial setback, the market has always resumed
its upward trend. To sell equities now could amount to
selling at the bottom of the market. The markets are likely
however to be volatile for sometime. Once the nature of the
Allied response to the terrorists is known, the uncertainty
facing investors will be reduced, which may be the catalyst
needed for stock markets to recover. But no-one knows and share
prices could equally well continue to fall - much is at stake
on the Allied response to the terrorists. |
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As
always 'Equity' investments should only be undertaken on a long-term
view of at least three to five years. This fundamental rule
seems more important than ever now. Many experts agree that
investors will usually be better off resisting the temptation
to make changes to their long-term investments simply because
of short-term stockmarket movements. |
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If
your personal circumstances are unaltered, and you are still
able to take a medium to long-term view, then it is probably
appropriate to do nothing through any period of uncertainty.
This view would also apply to maintaining any regular investments
- pensions, ISAs or savings plans. |
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For
what it is worth, JB continues to pay his pension premium into
funds largely investing in Stockmarkets and he has no plans
to change. |
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