BAKER DAVIES LIMITED
Unprecedented Times
“Been there, seen it, done it.” We have all heard this phrase. However, if you hear anyone use it in the context of the current economic and market machinations – they’re lying!
These are quite uncharted waters in which we find ourselves. With each day comes news which can either pitch markets into a buying frenzy (up over 8% in one day recently), or into panic selling at the imminence of Armageddon (FTSE 100 down over 5% before 9am on 6th October 2008). The level of volatility is in itself remarkable, but is merely a reflection of the enormous scale of uncertainty which still exists.
We have seen a real cooling in the oil price back to around $73.51 per barrel, which, whilst not cheap, is a real step forward from the previous highs of over $140. However, it is now liquidity, the financial markets and companies globally that have taken centre stage.
A concerted and coordinated response is required by world banks and governments. This will happen. It cannot not happen. The difficulty remains not only when, but how will it be done, what form will the brave new world take, and therefore what are the implications going forward. Again, massive uncertainty.
With the UK Government now guaranteeing up to £50,000 for investors in UK bank deposit accounts and European Union finance ministers agreeing on €50,000 (£38,900), at least some co-ordinated efforts are being made. The US $700 Billion Troubled Asset Relief Programme (TARP), after its failure to pass through the House of Representatives the first time, has now actually done little to reassure investors, and rather than answering questions, has even raised some additional ones.
As investors, it makes little sense to sell up our holdings in the current atmosphere. This would merely serve to crystallise any losses sustained thus far and take one out of the markets, which means no participation in good days (i.e. +8% in one day), or in the overall recovery we expect to see in time.
Those who are taking income from investment bonds (up to 5% per annum usually) may, if they are in a position to do so, choose to reduce or even stop drawing that income, as it will be negatively impacting on the capital. Those receiving a yield (fluctuating income) can continue to do so as this is generated separately from capital, although their capital values will undoubtedly have suffered along with everything else.
As a note of optimism, two highly distinguished fund managers are now saying they believe we are at, or very near to the end of the equity bear market and have already started buying equities again. Mr Anthony Bolton, famous for having run the Fidelity Special Situations Fund for some 20 odd years, is quoted as saying shares were “as cheap as I have seen them in my lifetime,” in particular, in retail and leisure sectors. When someone of his stature starts saying things like that, there may well be a light at the end of the tunnel.
However, we now wait to see what form the international concerted effort from central banks and governments worldwide will have going forward. We may have a very limited downside from here, but it is unlikely to be anything but a bumpy ride.
Produced by Baker Davies Ltd as a commentary on our house view with regard to world markets. This document does not constitute actual advice, but is simply a statement of our current views.