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One year
on from the terrorist attacks in America of 9/11 and the stock
markets continue to reach new lows on an all too regular basis.
The US market lost a further 12% of its value in September
2002 alone. This was the worst month since the crash of October
1987. The issues that investors are worrying about seem to
multiply almost as fast as the markets fall! Among the main
worries are: global political tensions, integrity of corporate
accounts, economic uncertainty (double dip in the economic
slowdown?), consumer confidence, the Japanese banking system,
deflation, downgrading of corporate forecasts, Life Assurance
companies' solvency, incompatible fiscal needs within the
Euro zone etc. etc.
The crude
statistics for equity markets continue to make poor reading
for the third quarter of 2002:
•
In
the UK the FTSE 100 fell 20% to 3721.8
• In America the Wall Street Dow Jones
Index was down 18%
• Tokyo
was down 13%
• Europe
was down 24%
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Is the
Cult of the Equity drawing to a close? The yield gap between
bonds and equities (the difference in the rate of interest
or income payable), which crossed over in 1959, is now perilously
low and in danger of crossing back. In the UK long bonds yield
4.3% and equities yield 4.2%. Are we really about to see bonds
yielding less than equities again? Surely only deflation would
justify this position. The last time the yield gap became
this low there was a strong rebound in equities of the order
of 40% in each of the following two years. The yield gap could
however be restored without an upward movement in equity prices:
•
The
Government is likely to issue more bonds with the result that
bond
yields should rise and the yield gap increases.
• Equity dividends could be cut.
However
unless equity dividends are about to be significantly reduced
or deflation really does become an issue, UK equities must
surely be underpinned at these levels. We do not think the
Cult of the Equity is over.
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The
UK equity market has now hit a six year low. Previous to this
over the last twenty-five years you would never have lost money
in the UK market over any five-year period. We are clearly in
new territory. At the beginning of the year we said that '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.'
Consensus forecasts are now around 4500, which would be a 14%
fall on the year but a rise from current levels. Clearly consensus
forecasts were too optimistic at the beginning of the year and
could still be so. |
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The
American market still looks more fully valued. Long bonds yield
4.6% and equities only yield 2.5%. The economic outlook is also
less favourable than in the UK. The accounting irregularities
are also continuing to be a problem. The US equity market does
not feel ready to make an early recovery. |
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We
have not seen anyone forecasting negative economic growth next
year. The consensus economic growth forecasts are all better
than for 2002 for all the major countries. (Again consensus
economic forecasts could be too optimistic.) We are expecting
a monetary stimulus from the world's central banks. Despite
the facts that Germany really needs interest rates 1% lower
than the rest of Europe, and that Japan really needs negative
interest rates, monetary policy is loose. It is the stockmarkets'
job to look ahead to 2003/4, at some stage they will do this
and should then begin to recover. The question we can't answer
is when this upward movement will begin? Market rebounds can
be very sharp. Virtually all commentators have been caught out
by the size and length of world stockmarket falls. |
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Conclusions |
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We have
got the timing of the recovery wrong but feel that our concluding
views in our last three reports hold good and are worth repeating:
•
No-one knows what will happen in the future.
• 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.
• 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.
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The
only new thing to add is probably to stress that the outlook
for continental Europe is worse than for the UK as Germany's
fiscal needs are not in line with the rest of the Euro zone.
The UK remains our favoured market. |
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Finally,
although we conclude favourably on the UK stockmarket, we cannot
guarantee an increase in values. We would therefore understand
the view of any investor, in pensions and elsewhere, who now
feels that enough is enough for the uncertainty and risk of
the stockmarkets. In these circumstances it is generally straightforward
to switch funds (from the range offered by your investment management
company) to lower risk ones such as Gilts or cash. If you would
like to consider this please contact us on 020 8876 1097. |
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