By STEVE RODGERS
Steve Rodgers is International Financial Planning Adviser with Blacktower Financial Management Group.
AT THE time of writing this article, the FTSE100 Share Index (Footsie) has just struggled to raise its’ head above the 4200 mark having been as low as 3781 earlier in November. (See table).
This compares to a year ago when it was around the 6500 mark. The current level is around 40 per cent off the previous high in October 2007 and the last twelve months can only be described as a rollercoaster ride for investors, with never more than a few days consistent movement in any one direction.
If you ask most people in the street how these troubled times compare to previous episodes of financial turmoil, they will often liken the present situation to the 1987 crash. However, I would disagree as the fundamental problems in 1987 arose from an over valued market. The difference this time around is that even before the credit crisis reared its’ head, shares were certainly not overvalued using the normal methods of assessment. Generally speaking, shares were actually undervalued before the crisis.
The current crisis to be more akin in terms of cause to the crash of the 70s when the UK stock market lost almost 73 per cent of its’ real value between January 1973 and December 1974, caused in the main by a number of ‘knock on’ problems with the US economy, followed by the Oil Crisis in October ’73.
This time round it has been overzealous lending in the US housing market that has created the worldwide credit crisis leading on to the current global recession.
No one can predict how long it will be before markets begin to recover, but they will and if history repeats itself when they do it will all happen pretty quickly.
Turning back to the 70’s crisis; when the recovery kicked in, the UK stock market increased in value by over 30 per cent in the first three months!
Sit tight
During the Depression, the US market hit its’ low on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 per cent.
Warren Buffet, one of the world’s most successful investors, made the following statements in a recent article in the New York Times, “Be fearful when others are greedy, and be greedy when others are fearful.” He went on to say, “Most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, 10 and 20 years from now.”
“What is likely, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
So what does this mean to the average investor?
For the person who was already invested in equity based assets before the current crisis, there really is little that can be done except hang on tight! To sell now will generally do nothing other than consolidate losses already incurred. Provided the assets held are fundamentally sound, the best thing will be to sit tight and wait for values to recover.
For the person who has cash to invest for the longer term, the current depressed market could be one of the best opportunities to present itself for years. Buying equities at the moment can be likened to getting a 50 per cent discount off normal prices. This sort of opportunity isn’t likely to present itself again for a long time so make the most of it. It is impossible to predict when the upturn will occur but if you sit on the fence too long, it is highly likely you will miss the main growth potential.
Many headaches
Obviously, with the current threats of further recession, there is the risk that share prices will fall further before they recover so you should not consider investing money that you might need in the next couple of years.
Falling interest rates have also caused headaches for cash investors. Many expatriates’ income has been squeezed further by deteriorating Sterling exchange rates.
These conditions have made it very difficult for risk-averse investors, especially those looking for income. These people might consider the range of structured products available that currently offer guaranteed income levels of, as much as, 10 per cent per annum for a fixed period of, typically, five years.
Capital is returned in full at the end of the term subject to certain conditions. For example, the product might be linked to a number of shares or an index and the value in these shares or index might have to fall over the term of the plan by a considerable margin – often by as much as 50 per cent. Given the current depressed market, these conditions are not, generally, unrealistic. However, the level risk does vary from product to product and it is important to ensure the level of risk is appropriate to your circumstances.
Falling interest rates also make bond funds look attractive. However, quality is the key here especially corporate bond funds. With future corporate profits being squeezed it is probable that some companies will fail, putting your capital at risk.
As always, seek professional independent advice before making investments.
Please contact Steve Rodgers of Blacktower Group for further information. Call 289 355 685 or email steve.rodgers@blacktowerfm.com
