Market mayhem but do not despair
Author: Cathy Dixon, investment director
This article previously appeared in Irish News in August 2011
For the first seven months of this year the market has traded in a range of 5600 to 6100, encountering a great deal of volatility but in spite of all this, looking relatively stable. The beginning of August came as a bit of a shock: traditionally a very quiet time for the stockmarket, many investment professionals were wrongfooted by the sudden and dramatic market movements. Barely pausing for breath, the market slid below 5000 with scarcely a second thought. This has reflected the general doom and gloom being heralded in the media at the moment, with the US, Europe and the UK all having their own problems.
We have seen the US suffering the indignity of having its credit rating downgraded from AAA with Standard & Poors, coupled with real fears that the economic recovery is stalling as evidenced by a number of poor statistics released recently. As we begin the long run-up to the Presidential election there are also fears that the enormous budget deficit is not being tackled effectively; QE2 seemed to disappear with barely a ripple, so would QE3 be any better?
Problems also abound in the Eurozone. Sovereign debt is still a major cause for concern, with worries continually resurfacing that other countries will be drawn into the mire. For so long Germany has been the growth engine of Europe, but we have recently seen very flat figures for economic growth which have given rise to a whole new level of worry that Europe is sliding into recession again. Banks are experiencing (or rumoured to be) liquidity problems, once again fuelling worries that we are revisiting the banking crisis of 2008. European leaders are rumoured to be considering issuing Eurobonds and in some quarters there is renewed speculation that the Euro has a very limited life in its current form.
Things are scarcely better in the UK. The economy has hardly grown over the last three quarters and we appear to be teetering on the edge of a double dip recession. There have been renewed calls for George Osborne to temper his plans for cutting the deficit and the emphasis in the Bank of England monetary policy committee has certainly shifted away from inflation/interest rates towards growth.
All this has been clearly reflected in the market. Gold has become even more popular, with the price being driven up to an all time high – over $1800 per troy ounce. Ten-year gilts are seeing their lowest ever yield and the FTSE 100 stands on a price earnings ratio of 9 with a yield of 4%. This is a clear indication of just how nervous investors are. It should of course be noted that while the equity market statistics make it sound extremely cheap, they are based on past earnings and it is the future that the market looks to. The end of the world as we know it? Hopefully not, but an undeniably difficult period in world economic history, with so many significant imbalances. On a brighter note, there is certainly value in the market and many companies are well placed to withstand difficult times ahead. The message is not to despair.
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.