Doom and gloom?
Author: Cathy Dixon, investment director
This article previously appeared in Business Eye in October 2011
These appear to be dark days indeed. The media is overwhelmed by stories of desperate times for the financial world and barely a day does by without more tales of woe. The third quarter of the year was dramatically dreadful. The FTSE All share index fell by 14.28% - one of the worst three-monthly performances on record – and it reflected the market’s mood. We have also seen more quantitative easing by the Bank of England, more downbeat economic indicators in both the US and the UK and still no decision from the Eurozone over the Greek situation. We have also seen a large downgrading of bank ratings by Moodys and a number of comparisons to three years ago, which does little to inspire confidence.
The market had been reflecting the uncertainty that was surrounding us from all angles, but has since recovered on the hope that the euorzone crisis would reach some resolution. By historic measures it is still not expensive, but it is hard to say it is cheap as we look forward to difficult times and potential earnings downgrades. Market observers also suffered from a fit of nerves when Mervyn King, Governor of the Bank of England, announced the quantitative easing (“QE2”), which in turn gave rise to the usual round of speculation as to how much good this actually does. It is often seen as a last resort – which does little to boost confidence – but £75 billion is no small amount and comes on top of the initial £200 billion already deployed. In the US there is increasing concern that growth is slowing to a standstill and the concern that we are in for a double dip recession is spreading rapidly, with every economic figure scrutinised for signs of this. In Europe the sovereign debt problem labours on. There is little sign of meaningful progress – just a plethora of meetings and much rhetoric on the situation. Politicians appear to be reluctant to tackle the underlying issues in a meaningful and co-ordinated manner, very aware of the unpopularity of decisions that may need to be taken. The European banking system is causing much concern as it appears to be ill-equipped to deal with the sovereign debt crisis in terms of capitalisation.
Clearly some of the same fears still abound that were prevalent during the 2008 crisis. The global financial system for the developed world is still suffering from the excesses that caused the credit crisis in the first place – principally the rash of unwise lending decisions. In a somewhat uncanny echo of 2008, the S&P500 index closed at exactly the same level on Monday 3 October as it had done three years earlier, three weeks after the fall of Lehman Brothers. Looking back further, the last ten years taken as a whole does little to promote equities: scant progress by any wide measure. It is, however, a question of timing. Within the last decade there have been numerous opportunities to make gains. Even now, as all seems to be interminably bad, there are opportunities. On a long term view few doubt the trend of emerging markets catching up and ultimately overtaking the developed economies, but equity markets on a global basis have all fallen, with the perceived higher risk areas being hit harder.
Locally there has been some better news, with Ireland showing signs of tangible progress but regrettably it is likely to take rather more than this to shake off the slough of despond.
For further information, please contact:
Cathy Dixon
Director
Investment management
T: 028 9072 3000
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Cunningham Coates Stockbrokers.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority. Registered number 131816.