|
BLYTHE
FINANCIAL
|
| |
Market Commentary
10 January 2002
|
|
| |
Review of 2001 and outlook
|
|
| |
As
we said in our September
report, the world index was already down by 22% in
2001 when the terrorists struck on 11th September. Worldwide
equity markets proceeded to hit their low points on 21st September.
In spite of a strong rally thereafter, it is only the second
time since World War Two that share prices have fallen for two
years running. The previous time was in 1973/4 when the UK faced
the miners' strike, a three-day week and high inflation. Now
although America, Japan and Germany are in recession the UK
may well escape. The UK government's forecast for GDP growth
in 2002 is 2 to 2.5% - many city forecasts are around 1.8%.
The
crude statistics for equity markets make poor reading:
•
The
FTSE 100 fell 16.2% over the year to 5217.4 (having fallen 10.2%
in 2000)
• The Wall Street Dow Jones Index was
down 7% (but rose 25% from the
21 September low)
• The
technology heavy NASDAQ index was down 21%
• Tokyo
was down 25% following several poor years
• FTSE
Europe was down 21.6%
• The
World Index fell 17.4%
• Only
six countries had positive returns:
Korea, Mexico, New Zealand, Taiwan,
Austria, Australia |
|
| |
We
have been disappointed by the performance of markets this year.
We mentioned in September that equities were looking historically
cheap relative to bonds. We have indeed seen a strong last quarter
recovery in equities from the very low levels immediately after
the terrorist attacks. This recovery was led by the technology,
media and telecommunication (TMT) stocks. But over the year
as a whole the best performing sectors have been the defensive
ones of tobacco and health or those linked to consumer spending
such as general retailing. Consumer confidence, bolstered by
reducing interest rates, currently remains strong as witnessed
by the good Christmas retail sales figures. The situation in
Afghanistan, although not yet reaching a conclusion, has become
far less of a worry for stockmarkets. Many city forecasters
are expecting the FTSE 100 index to be between 5750 and 6200
by the end of 2002. That is a 10% to 18% rise. |
|
| |
On
the other hand, manufacturers and exporters are facing the prospect
of another hard year. Cost cutting may allow corporate profitability
to rise but this is very dependant on consumer spending, which
in turn may be effected by rising unemployment. If interest
rates and inflation remain very low worldwide there is also
the thought that the cult of the equity may be over! We have
already seen some pension funds switching completely away from
equities into bonds. Equities have been considered as the most
consistent provider of real returns over time in an inflationary
environment but if inflation is no longer a worry, some investors
may no longer be prepared to take on the extra risk to capital
associated with equities. With UK equities yielding 2.6%, Gilts
yielding 4.95% and the Base Rate at 4% it is difficult to argue
that UK equities are offering exceptionally good value. Despite
this, we feel that equity valuations are reasonable and with
liquidity in the market we agree with the consensus of city
forecasters and expect UK equities to produce real capital growth
in 2002. |
|
| |
Conclusion |
|
| |
The
real determinant to the future path of worldwide stockmarkets
is likely to be how quickly America begins to come out of recession.
No one knows the answer. The UK (even if it remains recession
free) will not be able to move ahead without America. However,
we agree with the forecasters who feel that equities will provide
real returns in the future and that these returns will be higher
over the medium term (of five years plus) than that offered
by Gilts and other fixed interest securities. |
|
| |
We
recommend continuing to pay into any regular savings contracts
such as ISAs, pensions and unit trusts, keeping a bias towards
UK equities in your asset allocation. However, any new investment
monies should only be put into equities on a medium to long-term
view. As long as you are happy to invest on this time horizon
then the UK is our preferred market. |
|
| |
Japan
is in recession and well embroiled in a debt/deflation trap.
The Japanese government currently seems reluctant to bite the
bullet and make the hard decisions required. At some stage Japan
will come out of recession. Investors looking for a high-risk
option with a view to the long term may wish to begin to tentatively
put a toe back into the water in the Far Eastern markets. |
|
| |
|
|
| |
|
 |
|