Turbulent spell for the global markets

Posted on: 23 February 2009 by Gareth Hargreaves

Financial expert Graham Kerner reviews the global markets after another troubled week for investors.

Global markets endured another turbulent period last week with all the major global indices showing weakness as concerns over the global financial crisis continued to weigh on investors minds.

The FTSE 100 index sank to a three month low closing below the four thousand mark at 3889, having fallen by more than -3% on Friday and ending the week down more than -7%. The outlook for the economy continued to be the driver behind falling prices and the UK took its cue from Wall Street following markets closing at some of the lowest levels seen during the financial crisis.

Anglo American was one of the sharpest fallers being sold down sharply following announcements to suspend its dividend, cut output sharply and axe almost twenty thousand jobs. Other mining groups also such as Rio Tinto and Xstrata saw similar losses.

The banking sector continued to feature prominently. Investors fears over the length and severity of the global recession ensued leading to further concerns the Citigroup and Bank of America could be potentially nationalised by the US Government.

Despite a brief rally on Thursday most major banks ended the week down on the back of further sell offs. Royal Bank of Scotland record losses of £28bn as well as plans to sell of its Asian businesses hurt shareholders. Barclays, HSBC and Standard Chartered all saw relatively sharp falls with Lloyds Banking Group escaping marginally with only a minor decline at the end of the week.

Whilst most of the financial sectors struggled there were a few risers in the blue chip index. Prudential was buoyed by the planned sale of its local insurance business in Taiwan to China Life Insurance Company. Old Mutual also posted marginal gains despite being the target of shorting by some hedge fund managers. BAE systems issued full year results and lifted its final dividend leading to a modest rise in the share price.

European bourses fell sharply on the week with the EuroStoxx 50, the DAX & the CAC all posting the sharpest daily falls on Friday. Worries about the health of central and Eastern Europe held investors sentiment last week. Growing investor nervousness about the worsening economic conditions across the region and the possible impact on European banks contributed to a decline of more than -7% in the FTSE Eurofirst 300 index. The banking sector also contributed to declines in Japan, where the broad Topix share index ended the week at its lowest level for 25 years.

The shape was similar in the US as the sharp sell offs pushed the S&P 500 index below the psychologically significant 800 level. Nervous investors around the world fled for the perceived safety of gold, government bonds and the dollar. Government Bonds in the US, Germany and Gilts issued in the UK all saw their yields fall as investors plumped for a safer home in the worsening risk environment. The US Dollar was a clear winner in currency markets as the safe haven status of the Japanese Yen has been called into question. Gold rallied strongly by almost 7% during the week and touched an 11 month high of $1005.4 per troy ounce.

Beware prophets of doom

Scouring through the financial press is a depressing task at present as journalists with preponderance for doom, gloom and Armageddon becoming increasingly the ‘soup de jour’. It was reassuring to see The Telegraph Money section include an article bringing for the point that those commentators purveying the unremittingly bleak outlook did not see the current crisis coming and thus may not see the recovery either. History has provided us with a learning point that when all the experts are agreed it is generally time to take a differing view.

Successful investors buy markets when they are oversold and sell markets when they are overbought. Estimates in the UK and in America suggest that stock markets are too cheap and the raft of comparisons with the Great Depression in the twenties don’t stack up as many would suggest. US Gross Domestic Product fell sharply in the Depression with a double digit fall of 13% in 1932. US GDP rose in 2007 by 2%, 1.5% in 2008 and the expectations for 2009 are for a fall of around -0.3%.

Mortgage foreclosures and job losses are also far lower than they were in the Depression. Recent US unemployment figures indicate sharp rises but headlines showing the worst job losses since 1974 fail to explain that the US labour force is 65% larger than it was in the seventies.

Cash held on the side lines by experienced investors is also important with a US survey recently reporting that experienced investors had over 40% in deposit. The last two occasions when deposits were almost as high was in 1991 and in 2002 which turned out to be two of the best occasions to have bought equities since 1987.

Falling prices

Property Values, Equity Prices and Interest Rates have all seen sharp falls. Costs too are falling and it has become widely accepted that for the first time in almost fifty years, the UK is going to experience a deflationary environment. A little bit of deflation could spell more positivity as we pay less on food and energy and feel a little more inclined to spend which should help the ailing retail sector.

Producers may also be able to widen profit margins a touch as raw materials become cheaper. However, the official statistics have a way of shrouding the real picture. Many borrowers have seen the cost of living reduce dramatically as variable rate mortgage repayments have been slashed by falling interest rates.

However, many individuals who are mortgage free or perhaps in their retirement who have a greater range of fixed costs will not have felt this alleviation in the cost of living. The Times outlined some of the ways which pensioners can beat the squeeze on income including shopping around for food and energy deals.

Another option is to seek advice on boosting pension provision or taking pension benefits. Historically low interest rates mean that annuity deals are quite poor but shopping around with other providers could bag you as much as 20% more income. The flexibility to remain invested and draw down income and tax free cash could also help pensioners recoup losses made in the last few years.

Get out of jail with profit

Policyholders in With Profit funds have seen bonuses withdrawn, the outlook for future returns capped and huge penalties attached for those who wish to withdraw and invest elsewhere.

With Profit providers have come under fire in recent years as they applied the ‘market value adjustment/market value reduction’ clause which allows the insurer to reduce the final surrender value of policies to reflect falls in the underlying investments.

The Times Money reminded investors that many of these products carry a ‘spot guarantee’, which enables investors to take their money out on a specific anniversary, commonly the 10th, without being hit by the MVA/MVR. According to exitwith-profits.co.uk, an estimated 300,000 people will have a guarantee in 2009 that allows them to withdraw their money from a With Profits fund penalty-free.

Saving the nation

The Guardian reported that thousands of savers have not claimed winnings on Premium Bonds. According to N&SI, there is over £30m in unclaimed prizes where savers have failed to pass on new addresses or are unaware that parents or grandparents invested for them. Millions of pounds are also sitting unclaimed in current and savings accounts around the UK. Not knowing where your assets are located can lead to problems, particularly on death where it is important to be able to value an estate for tax purposes.

Despite the good news on the unclaimed prize funds, The Telegraph highlighted that N&SI would be cutting returns on most of their variable and fixed rate savings products and, whilst the 1.8% rate used to calculate the bonus pot for Premium Bonds will be held for next month’s draw, it is likely that this too will be cut for future draws, reducing the size of the winning fund for savers and the odds of any return.

Practical options

The Telegraph Money reminded readers that despite stock market shocks and plunging interest rates, you cannot opt out of growing older and thus it is just as important to make provision for the future through saving and investing. Key practical measures included using your ISA allowance to get the best possible returns on cash.

The Times reinforced this message reporting that the tax efficiency and the annual maximum on cash ISAs means that banks and building societies tend to offer more attractive rates on their ISA product. Diversifying through pooled funds was also mentioned as a way of managing risk.

Pension products which offer a return of up to 40% thanks to the tax relief paid by the Government. This tax relief combined with the often long term nature of pension planning reduces the risk of short term market volatility significantly. Company sponsored schemes may contribute on your behalf or match your contributions increasing the power of your savings.

Investing for income

The Financial Times led with an article on investors seeking income. Investors who have seen the return on their savings dwindle as interest rates have been slashed are finding the stock and bond markets increasingly appealing as income generating vehicles.

Dividend income on many blue chip companies is historically high and attractive for income seekers. The income available in the corporate bond market is equally appealing as many commentators feel that the market is still pricing in too much risk of default, particularly in the investment grade bond market. Whilst markets remain volatile, broadly diversified portfolios of equities and corporate bonds can benefit from attractive income streams. St. James’s Place has a range of funds looked after by some of the UK’s top rated income fund managers.

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