Are we set for an autumn stockmarket meltdown?
This summer has proved a painful one for equity investors with stockmarkets seeing their biggest falls since the credit crunch of 2008. The FTSE 100 sunk 20% to below 4800 at one point in August, and £5 trillion was wiped off global equity valuations in just a week.
The pain was caused by moribund economic conditions in the US and the loss of its AAA debt rating, eurozone debt worries spreading from the periphery to the core and general concern about the trajectory of global growth.
The worst isn't over
Although these economic problems emanate from other countries, experts warn that UK equities could still suffer throughout the rest of 2011.
"Financial markets can deviate from the 'economic fundamentals' [of their own country] for prolonged periods," says Samuel Tombs, UK economist at Capital Economics. "UK equities could therefore continue to be dragged down by adverse developments overseas."
In addition, the drop in equity prices has helped realign stockmarkets with the bond markets, says Tombs, and they both "now share a much more similar, downbeat view on the economic outlook". He believes the FTSE 100 is unlikely to recover strongly and may still be around the 5000 level at the end of the year.
The August 'curse'
Stephen Barber, economics adviser to Selftrade, is more worried about what history says about August meltdowns. He says that the great autumn crises all have their origins in August, such as sterling's exchange rate mechanism crisis (1992), the Russia crisis (1998) and the more recent banking crisis (2008).
"Whether or not 2011 will see an autumn meltdown of its own remains to be seen. Policymaker interventions, so far at least, appear to be having a limited effect," Barber comments.
Although the FTSE 100 has looked on a more assured footing as we enter September, Talib Sheikh, co-manager of the JPMorgan Cautious Total Return fund, believes markets will continue to fluctuate and look set to go lower over the next three to six months.
Indeed, traders saw the stockmarket meltdown as an opportunity to buy blue chips on the cheap as well as trade volatile banking shares. TD Waterhouse and Alliance Trust Savings saw record trading activity, with significantly more 'buy' trades than 'sell' trades.
The Share Centre also saw a sharp rise in activity. Nick Raynor, investment adviser, comments: "The recent weakness in the market has made valuations of many FTSE 100 companies look very attractive. If investors have not been exploring this [from a yield perspective], they certainly should be doing so now."
He adds that investors have been snapping up quality Footsie companies that are now sitting on impressive historic yields. "Aviva is offering well over 7% and Vodafone has over 5% on the table at current prices."
As stockmarkets lurched, the price of gold soared, smashing through $1,800 an ounce on 12 August. Willem Sels, UK head of investment strategy at HSBC Private Bank, reckons there is more for to go for, and not only as a hedge against crises.
"As an asset that doesn't have a yield, the cost of holding gold, relative to cash, is usually negative. However interest rates in the US are likely to remain extremely low, which means that the cost-of-carry on non-yielding assets like gold isn't likely to be an impediment to owning it."
Thsi article was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Named after a high value gambling chip, the term is used for an investment seen as solid and whose share price is not volatile. Blue chip companies are normally household names and have consistent records of growth, dividend payments, stable management and substantial assets and are the bedrock of a pension fund’s portfolio.