Last week was the worst week for global equity markets since the depth of the financial crisis. The FTSE100 saw a drop of 10 percent – the worst since November 2008. Clients are understandably concerned. However we think it is important to put the facts into perspective.
The first question to answer is “What has caused this loss of confidence in equity markets?” The answer is well known but worth repeating. The underlying concerns are that the Eurozone debt crisis is spreading and that a weak US economy will damage growth prospects and potentially lead to the much dreaded Double Dip. In particular investors are concerned that there does not appear to be a political will to resolve these problems. Investors’ rush to gold is an indication of their all-time loss of faith in Governments.
It is important to put the fears and figures into perspective. If we look at the pattern of recovery from any of the previous recessions it has not been a continuous upward line, there have been dips along the way, so the current situation is not unusual. Although the press record huge losses on their front pages, it is worth remembering that the FTSE 100 is still trading 33 percent above its 2009 lows.
Many clients need income and it is worth remembering that the net yield on the FTSE 100 is 4.4 percent. You would need to get 5.5 percent from a Building Society account to match this and with the current low interest rates we know that this is impossible.
Although there are serious concerns about the reduced credit rating of the US there are some positive economic indicators – in July the US payroll reported the creation of 117,000 new jobs across all sectors and of US Companies recently declaring their earnings, 70 percent have beaten their earnings expectations.
How should clients react to this situation?
Most clients have well spread portfolios with a cash emergency fund so our advice is to sit tight. We never recommend clients to sell in a falling market because there are costs involved and it is very difficult to go back into the market at the right time. This view is supported by research carried out by Fidelity which shows that if you were invested in the All Share index for the last 15 years you would have seen cumulative growth of 168 percent or 6.8 percent per annum but if you had pulled out and missed the best 10 days in the market the total return would have fallen to 2.5 percent per annum.
If you do have concerns do please ring or email us.