IN these stormy days it is easy for people to want to bail out of the investment “ship” and head for safer ground. This would seem sensible given the unprecedented scale of recent events, specifically the credit crunch, banks becoming insolvent and large equity falls across most sectors.
For most investors this will be an instinctive reaction rather than a considered approach. We believe that only in a very few instances will this be proved to be the right course of action. For the majority of investors we are certain that this, in the long term, would prove to be a mistake.
So how do we prevent a mass exodus from the markets at exactly the wrong time? As investment advisers we believe that it is our responsibility to contact every client and discuss their position. This is important for lots of reasons, not least of which is to provide a counter balance to the blanket press coverage that is unambiguously biased towards a negative view. Someone in the office reminded me that bad news sells papers!
So what are we saying to our clients? Well let’s start with some basic investment principles. Buy low, sell high and make sure you do not have to sell at the wrong time. We feel that it is vital advisers remind clients of the simple rules so that panic does not prevail over logic. Basic stuff really, but our first step to change client perceptions away from wanting to jump overboard.
Opportunities for the shrewd
We are really trying to stop clients following the “herd” mentality. However, and this is really where we believe an adviser earns his or her stripes, we look to discuss with the client how he or she should not only stop following the herd but instead go in the opposite direction. What we mean is that during market downturns there are always opportunities that are presented for the shrewd investor.
So are things really that bad? Despite the sheer scale of recent events in the economic world, I believe that stock markets have held up relatively well. Recently panic set in when the FTSE 100 fell sharply in a single day with losses around 8%. However, should we be panicking to a point where some are suggesting that we are witnessing the end of capitalism? While it is no doubt a turbulent and uncertain time, this does not seem so disastrous when compared to previous market crashes.
For example, on 19th October 1987, the FTSE 100 fell by 22% following losses on Wall Street and increasing fears about interest rates and a falling dollar. However, when economic disaster did not occur, the market recovered.
In this case, history has shown that those who can resist the natural temptation to reduce their holdings, or perhaps are even brave enough to view such periods as good investment opportunities, may well be rewarded in the long run.
Despite the awful economic backdrop, the stock market in the UK (FTSE 100 between 4000 and 5000) clearly represents good value for the long-term investor. At around 4800, the yield on the index (even accounting for problems in the banking sector) is that of 10-year gilts. This has traditionally been a good indicator of a buying opportunity within equities.
With the index falling below 4500 we see the yield on the index looking more attractive than even cash-based holdings. What does this mean in simple terms? For those holding shares, they are still getting a better return than cash even if the share price does not increase. Something that is highly unlikely over the longer term.
Equities will only become more attractive as the interest rates fall further in the future. Although it should be remembered that the value of an investment is not guaranteed and can fall in value as well as rise.
September and October are notoriously awful months in the stock market and this year is proving no exception. Traditionally, towards the end of October markets often perk up a little. Perhaps I am being too optimistic but with such pessimism around and cash levels both privately and institutionally at very high levels, I think it would only take a tiny bit of good news to see a sharp rebound, although as I mentioned earlier we are not at the end of the current financial crisis.
I do maintain my view that gradual buying on the poor days will pay dividends in the future. Emerging markets also look incredibly oversold to me, bearing in mind they are not suffering the same credit problems.
I also believe European Equity markets to currently be at an attractive entry point. On a valuation basis, they are cheap. Markets are currently trading on around 10 times forward earnings – a level that represents a discount of around 40% to the long-term average.
Another encouraging factor is dividend yields, with European stocks yielding, on average, more than 10- year government bonds. The last time this happened was in 2003, just before share prices enjoyed a four year bull run.
Positive sign
One of the biggest concerns for investors this year has been inflation, which was driven by rising food and energy costs. However, the recent fall in oil prices, which has come back sharply from its four-year high, and falls in some food prices will help ease these worries and this means we should see inflation numbers improve towards the end of the year. A positive sign for the financial markets going into the future.
Indeed, this view is further supported by Franklin Templeton’s Mark Mobius, who is already to start looking at the next bull market and personally believes that the current crisis will be over within a year. Having witnessed his eighth bear market, the emerging markets expert said the downturn in the economic cycle is allowing his team to start looking at opportunities they might not have considered before.
So are there any opportunities at the moment? We honestly believe so and would like to remind clients of the famous L. P. Jacks’ quote: “The pessimist sees the difficulty in every opportunity; the optimist, the opportunity in every difficulty.”
Nico Kontou Goymer is at Allchurch Bailey Investment Consultants Ltd, Almswood House, 93 High Street, Evesham, WR11 4DU; telephone 01386442597, e-mail invest@allchurchbailey.co.uk.
