Market Update
By Mark Dampier | 07 Oct, 2008
Can we really make any sense out of the stock market movements? It is well known that stock markets are a discounting mechanism. In other words they look ahead and try and reflect what is going on in the future. Unfortunately this is particularly foggy at the moment and just when things may seem to be settling down another bank crisis comes along.
Uncertainty and fear are the present governing factors which mean that stock markets are being sold down indiscriminately. This means good stocks as well as bad. Fundamentals are thrown out of the window in the short term as investors worry about where the next problem is coming from.
There is no doubt to me that value is appearing in the stock markets despite the economic backdrop of falling house prices and recession. However value in itself is not enough. The banking system is under extreme strain. In my view it is only government action and a huge policy initiative that can start to turn around this situation. This is somewhat unfortunate as my faith in politicians is exceptionally poor. The UK government has been behind the curve ever since Northern Rock. The Europeans are even worse. The fact is that they need to get ahead of the problems rather than fighting individual fires.
The crux of the problem is confidence in the banks and amongst the banks themselves. I believe the sort of policy initiative we need to see is the government actually taking stakes in the major banks. In some respects the problems are simple. The banks need more capital and they need to take a greater margin on the products they produce. Therefore we need to see interest rate falls starting this week. I expect them to halve over the next six months from where we are today. Believe it or not banks and building societies have made little or nothing out of mortgages for the last few years. This needs to end. Therefore some of these rate cuts wouldn’t immediately come through as the banks need to recapitalise themselves.
I believe a government initiative to help recapitalise the banks and falls in interest rates will start to help sentiment and, combined with low valuations, could help to turn the market around. The market is yielding almost 5% which will look very attractive if interest rates start to fall sharply. I realise in the recession that some of these dividends will be cut but income managers that I have talked to believe that they will be able to hold their dividends and even increase them a little.
In conclusion there is no doubt that markets will stay volatile for the short term but value is appearing and in some countries it looks compelling. My belief remains that if people are invested and have sufficient cash for their short term needs then they should not be concerned about staying invested. If cash is available to invest then drip it in on these bad days. If you are doing a regular savings plan don’t stop it, even think about actually increasing the contributions as this type of market is ideal; allowing more units to be bought on the bad days.
