The current dip in the FTSE is indicative of a shift away from equities to more safer forms of investment
So the bad news was all in the market, was it? Extraordinary, then, that stock markets are still falling. Support levels are snapping like dead twigs in winter. Once the FTSE 100 index had failed to hold 4,000, it slid through 3,800 and then the critical level of 3,650 within days. Looking back towards the end of last year, the fear was that, once this happened, the next stop was 2,800.
Analysts have been rattling the network to see what explanation drops out for the sudden plunge in confidence. Fingers were pointing at the big life companies, many of which are under pressure. But if that was the only reason, the index should have bounced back again as other institutional players picked up the slack. Besides, markets everywhere are soggy, not just the UK.
War fears are an obvious answer, but this is precisely what was supposed to have been discounted. Perhaps that was when there was still some faith that a US-led adventure in the Middle East would be won in short order, with the help of overwhelming numbers, superior technology and spine-props for the more reluctant allies. It is increasingly clear that even if the military operation is swift, the clear-up and handover will take time. The price of oil, for example, will not revert to a stable $23/barrel the day after Saddam Hussein is moved on or out.
Maybe investors have given up on what is now dubbed 'the cult of the equity'. If it was a cult, it was a pervasive one. For more than 20 years, there was a devoted and widespread following. Equities had outperformed every other asset class over every period of time you cared to select, so, naturally, most investors bought equities.
First mistake: some didn't look too closely at anything after that. Never mind the fancy price/earnings ratios, sloppy management, imaginary markets. Second mistake: many assumed that because, historically, equities were first choice, they would just keep outperforming. In fact, it is probably the other way round ' as soon as everyone piles into a particular asset class, it is bound to hit the buffers.
In the past few months, some fund managers (among those whose mandates allow them some latitude) have dared to cut an underperforming asset class. Boots' pension scheme went the whole hog and axed the lot. In the US, Abby Joseph Cohen at Goldman Sachs has cut weightings to 75%. Steven Galbraith at Morgan Stanley has cut to 70%, Richard Bernstein at Merrill Lynch, the mega-bear of Wall Street, cut his equity holdings in December, to just 45%.
As the big institutional investors continue to dump shares, the markets will sag further. Perhaps at some point there will be a rebound, but perhaps not, depending on a host of conflicting factors. The only other way to alter the equation of supply and demand is to tighten up the supply. If there wasn't quite so much stock available, punters who want stock might value it more.
Coincidentally, companies are coming to the same conclusion. What is the point of being listed if you can't raise the capital you need? In the bad old days, there might have been some personal glory for the ambitious CEO, but that cult really is dead. So far, there is just a trickle of smallish UK firms going private, but there are plenty considering it. These are highly uncertain times. Quite apart from the war news, there are plenty of other things that are not fully 'the market'.
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