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Stockmarkets
around the world have continued to fall in the first six months
of 2002. It has been the defensive stocks, which have outperformed
the markets. In the UK the tobacco and real estate sectors have
achieved capital gains of 28% and 10% respectively. The TMT
(technology, media and telecommunication) stocks have resumed
their rapid decline. A few individual stocks have also managed
to ignore the bear markets and rise. However taken as a whole
the indices for equity markets continue to make further poor
reading for the first six months of 2002:
•
The
FTSE 100 has fallen 10.7% to 4656.4
• The Wall Street Dow Jones Index down
7.8% to 9243.26
• The
technology heavy NASDAQ index down a further 24.9%
• Tokyo
was down 25% following several poor years
• FTSE
Europe was down 15.0%
• Tokyo
was up 0.8% following several poor years |
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We
have been disappointed by the performance of markets this year.
Investors now have the recent accountancy scandals and misrepresentation
of profit at three large American companies (Enron, Worldcom
and Xerox) to add to their worries. The risk of fraudulent accounts
has always been present but has only been brought to the forefront
of investors' attention recently. America has been in recession
and it is in such an economic climate that 'creative' or fraudulent
accounting is likely to be found out. Continued worries over
financial statements is likely to mean that investors will now
only be prepared to value shares on a lower multiple of earnings
than previously. In other words some investors do not feel that
the high yield currently available on shares is worth the risk
given the lack of visibility about future earnings. |
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Bonds
and cash now account for approximately 14% of UK pension funds
holdings up from 4% in 1990. Some analysts forecast that this
will rise to 20% in the near future amid talk of the death of
the 'Cult of Equities'. On the other hand, others believe that
such talk in itself creates a very strong 'buy' signal for equities.
At Blythe Financial we believe that over the medium term (five
years plus) equities will continue, as in the past, to outperform
bonds. The first six months of the year have been very disappointing
but until the American economy is safely seen to have emerged
from recession, the UK and other European markets are unlikely
to make much progress. However, once equities do start to outperform
bonds again, we believe that market sentiment will very quickly
swing from pessimism to optimism. |
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The
Japanese market is showing signs of stabilising. As we said
in January, investors who are 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. |
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Buy to Let Property |
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The
poor performing stockmarkets have inevitably led investors to
look at alternatives for the long term. The most frequently
discussed option in our offices is 'Buy to Let'. We recognise
that residential property has been an outstanding investment
over recent years, however there are a number of important differences
and a significant similarity between property and equity investment: |
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Differences
•
Property
requires time and energy to buy
• Property requires time and energy to
manage and maintain
(even if there is an agent)
• Property
requires time and energy to sell
• Property
is dealt in large financial chunks (you can't buy a little,
sell a little)
• Property
is likely to be your biggest personal investment already
• Property
is generally financed with borrowings (increasing the potential
gain but also the risk)
• Property,
where financed with borrowings, is directly affected by interest
rate changes
• Property
provides somewhere to live and we all need somewhere
to live |
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Similarity
•
The
capital value can fall as well as rise |
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Conclusions |
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The
markets are no riskier now than they ever were, however the
perception of that risk and your attitude to it may well have
changed. It is important to keep your own risk profile under
review and we have set out the factors you should take into
account when coming to your judgement on our Risk
page. |
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Otherwise
our conclusion remains as it was six months ago. We offer no
apologies for repeating it! 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.
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The
next few weeks could prove crucial with major US corporations
reporting their second quarter results. Profit warnings will
delay the recovery in stockmarkets. However, we agree with the
forecasters who feel that equities will continue to 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. |
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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 (at least 5 years). As long as you are happy to invest
on this time horizon then the UK remains our preferred market. |
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We
recommend that you consider 'Buy to Let' property but that you
think carefully about the points raised above. |
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