The 10% bounce in markets after the declaration of war will do nothing to tempt back reticent equity investors
So that was it, then, the declaration of war dividend, the rally that was supposed to accompany the removal of geopolitical uncertainty as the US finally blew the whistle to launch the war with Iraq? A 10%-15% uplift on some markets, and retracement over the following days?
Surely this cannot be the outpouring of relief and resurgence of confidence we were all banking on? In the past weeks and months, City talk among the optimists was about a rebound of 30% or more, an unmissable rally to herald the global economic turnaround that must happen, surely, after three consecutive years of bear markets.
Investors are consumers of a kind and if today's demanding consumer entered a retail store to find that Sale Of The Century meant a miserly 10% off the normal price, they would walk right out again. Of course, there are people who are never tempted by sales but a bargain is a huge attraction for the majority of shoppers. A 10% discount wouldn't feel like a bargain, and a 10% rally doesn't feel like a revival.
The fact that the move upwards has run out of steam so quickly suggests that exactly the opposite is in prospect and there is further downside to come. True, the dollar bounced back and the oil price dipped, but current events have little relevance for the long-term challenges facing both. The week's excitement reflects the triumph of hope over expectation, and the understandable desire for the military offensive against Iraq to be quick and successful.
There is still a pervasive feeling that if we can just get the war out of the way, global investors will have a clear run at another bull market. Better to pay over the odds for some stocks than miss the big rebound when it comes. Yet such sentiment flies in the face of increasing evidence that the path back to market levels of 1999/2000 will be slow-going, rocky and dangerous. The smart money is sitting on the sidelines as fundamental realignments in investment strategy and corporate structure take place. It is just beginning to dawn on institutional investors that they hold too much in equities and far too much in the wrong sort of company. Most fund managers want dividends today rather than the promise of growth tomorrow. Demand for high yield bonds is growing apace, as is interest is specialist sectors such as property and hedge funds.
On the corporate front, investment banks are closing non-core businesses with a new determination. Out go the private banking boutiques, the private equity ventures and the image boosting technology acquisitions. It is all about share buybacks, de-leveraging and downsizing, positive factors in a positive environment, but sure signs of a bunker mentality in testing times. Private investors in the UK are still spending their way to greater debt, but even here, reality is beginning to filter through. Interest rates have stopped falling, job losses are more visible, the housing market is softening, tax increases are starting to squeeze and inflation is feeding through to household budgets. No surprise then, that unit trust fund inflows are down sharply on last year.
Typically, the first stage of any turnaround will not immediately tempt investors back to the markets. Stock they would have bought at double the price six months ago is being passed by. The longer the slowdown, the bigger the bargain has to be to attract players back into the game. Ten percent upside won't float many boats and it may be some time before we get something more substantial and sustainable.
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