Specialist Independent Advisers based in East Anglia

Lovewell Blake Financial Planning Limited

Media Centre

Market Commentary Q4 2011

1 October 2011

There were widespread predictions before the recent stock market decline that the economic problems in the US and the Eurozone would impact on share and bond prices. So should investors have been switched into cash?The answer will be no , for a number of

No one can accurately and consistently predict the movement of markets.

 Investment should be for the long term. Time in the market is always preferable to timing the market. It is not surprising that many fund managers used the market setback as an opportunity to buy at lower prices.

Switching large holdings and entire portfolios involves costs, which will impact on your returns.

Cash returns are in any event notably unattractive and will not compensate for inflation.

 

It is important to stress on these factors but also take into careful consideration the events of the last month. During the second half of September equity markets came under increasing pressure as investors worried about global growth slowdown and Eurozone sovereign debt markets. The banking sector in Europe was very much in investors’ sights as rumours circulated of more pressure on funding and liquidity.

At the G20 conference in Canada, the US and China pushed European leaders to act, as did the International Monetary Fund. Rumours have since circulated of a significant package being made available to support the Euro sovereign debt markets, whilst allowing Greece to default and banks to restructure their balance sheets. According to the UK chancellor George Osborne, the EU leaders have six weeks until the next G20 conference to orchestrate such a deal.

Overall, equity markets fell between 5%-7%, and risk assets were generally weaker. The current levels of market volatility have resulted in many parallels being drawn with the financial crisis of 2008. However there are some key differences. While some economic indicators have deteriorated sharply and housing markets remain weak, data is not at the point of recession. In fact recent earnings and evidence from corporations does not tally with a dramatically worsening economy.

Another major cause of the severity of the bear market in 2008 was leverage in virtually all parts of the economy; this is not the case now with many companies in much better shape with strong balance sheets. The problem appears to be confidence: until we see some clarity in trading conditions, companies will be reluctant to spend cash, ultimately keeping unemployment elevated. In the short term, corporate profitability should be acceptable, but if the absence of confidence persists the economic slowdown could turn into something more serious. The direction of the markets and the economy will therefore be dictated, in the near term, by the policy measures taken by governments and central banks to restore confidence.

At the moment the best advice is, do not panic. A well diversified portfolio should be sufficiently robust to come through with positive results in the longer term, adjusted as appropriate from time to time to take account of market trends and changes in personal circumstances.