So much for the rush of patriotic buying in the aftermath of the terrorist attacks on the US. Panic,...
So much for the rush of patriotic buying in the aftermath of the terrorist attacks on the US. Panic, fear and, in some cases let's be honest, greed pushed the world's stock markets into one of their bleakest weeks ever.
Dow Jones only missed having its worst-ever week by a whisker ' it was only worse during the depths of the 1933 depression. In the UK, meanwhile, one astute commentator pointed out it only need another 38 days like last week for the FTSE100 index to hit zero.
Given the cocktail of emotions that followed the attack on the World Trade Center, perhaps it might be right to say that enough is enough for the moment and shut up shop for three months.
Anecdotal evidence and reports in the press suggest a rush of investors doing just that and piling into fixed interest securities ' bonds issued by blue chips banks and building societies, gilts, US treasury bonds and so on. In theory, it's hard to fault that strategy.
US interest rates will go as as low as 1% according to some commentators and interest rates seem certain to fall further in most of the western world, excluding Japan where short of paying you to borrow money, it's hard to see what will get the economy moving.
The snag is that with western governments loosening the monetary purse strings to the point where they don't exist, the risk is that two or three years down the line, inflation is just waiting to emerge again. Any sign of it and all bets will be off in the bonds market.
Of course, inflation-linked bonds are another option. But heavy buying by pension funds has left them still looking expensive. A far better alternative could be some of the blue chips that have been indiscriminately sold over the past two weeks.
A very good place to start is to look at dividends. As one US fund manager commented last week, while it is not that difficult for companies to manipulate earnings to get the right number, the dividend is a different story. It is paid or it isn't.
Bijal Shah at SG Securities reckons that the sell-off of some sections of the equity market has now reached the irrational level. Take the pharmaceutical sector giants GlaxoSmithKline and Merck. Earnings from drug industry have never declined significantly in real terms, says Shah, in the past 20 years. The shares, though, offer yields (2.6% for Glaxo) as high as inflation-liked bonds (2.3%) but have the potential for growth well ahead of inflation.
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