AS we enter the spring and look back at the previous year, it was certainly a rollercoaster of a year in 2007 (particularly the last five to six months) in respect of investment planning.
This has carried on well into 2008 and it is easy for all concerned to become caught up in the momentum of a falling market (just as it is easy to get carried away when the markets are rising!).
In the few paragraphs below we offer our views on the markets, economies and investments in general and specifically what we believe clients should be doing over the coming year (and in particular the next few months).
The position so far…
Firstly, the news is not all bad! It has been good, from an investment perspective, to see the FTSE100 Index finish the year 3.7% ahead of where it started, and 7.4% ahead in total return terms (including dividends). Although it was generally a very disappointing six months for investors, good positive returns were achieved in some areas, most notably China which grew by 67% (in local currency terms).
Opinion on the prospects for the world economy in 2008 is mixed. The main issue appears to be whether global recession will happen (particularly in the US). While it seems almost inevitable that world economic growth will slow as a result of the deteriorating situation in the credit markets, consumer confidence, house price falls, etc., we disagree with those who predict a full-blown recession.
This is based on the speed of growth in the world economies prior to the current problems, and the concerted effort of the world central banks to manage economies through an economic slowdown through interest rates cuts.
The Bank of England (through the Monetary Policy Committee) in order to stimulate growth voted on 6th December to introduce the first UK interest rate cut since August 2005.
In the US the Treasury Secretary, Hank Paulson, said they had been “rushing to craft a fiscal stimulus package to boost spending in response to a rise in unemployment figures in December”. All very good signs that those with the power to manage and influence the economic cycle take the situation very seriously.
Calmer view
Based on this, and further rate cuts, we are urging clients (as we always do) to take a calmer, longer-term view with their investments. It would be unwise to make rash portfolio changes now in response to short-term market movements when the investments were set up in the first place with a longerterm view.
This could seriously harm a portfolio’s overall return. Remember, investment values can rise just as sharply as they can fall! Our advice has been that equities should always be held for the medium to long-term, i.e. five years plus, in order to weather any short-term turbulence in the markets.
Prospects going forward…
Recent market movements lead us to believe that investors should be regaining in confidence. Schroders, a leading investment house, recently quoted the following:
- Underlying profits are robust and underlying dividends are estimated to grow by 8% in 2008.
- There is a real divergence between a company’s share price and what the underlying assets are really worth (a clear sign that the markets have overreacted).
- There are signs of recovery in company take-over activity. What should clients be doing, therefore, going forward?
In the short-term we expect UK equities to continue to be somewhat volatile. Recent market instability means that many companies are trading at attractive valuations. Because of the low share price, equities are offering attractive dividend yields.
We believe that the current irrational behaviour and market volatility has led to conditions which produce buying opportunities for investors (Bloomberg has been quoted as saying that equities haven’t been this cheap for 30 years or more). Provided that the US (and global) economy is able to steer clear of recession, the falls in share prices that we have seen (FTSE 1200 at 5338.7, the lowest since October 2005) the current position should turn out to be a major buying opportunity.
So the simple message is: “Don’t panic.” It is important to remember that there will always be short-term swings in markets but shares have historically outperformed other types of asset classes over the longer term.
In conclusion we would expect 2008 to be a bumpy ride; however, the “rollercoaster” is still on an upward trend.
