It is too early to understand fully all of the ramifications of the terrible events in New York and ...
It is too early to understand fully all of the ramifications of the terrible events in New York and Washington.
The attack has disrupted the financial system and the infrastructure of the US. This resulted in the Fed cutting interest rates by 0.5% before the re-opening of the US market. We believe further cuts of a similar magnitude will be forthcoming.
Federal Aid of $40bn will be provided for infrastructure work and immediate security measures. Defence spending will rise providing stimulus for the economy (and defence stocks).
In the longer term, these measures will raise concern about a diminished budget surplus and a potentially steepening yield curve with fewer buybacks in the future.
Central banks have committed to providing necessary liquidity but the financial sector will undoubtedly suffer, with insurance and re-insurance companies the hardest hit.
However, overreaction may provide longer-term buying opportunities in well-reserved insurance companies that will ultimately benefit from rising rate premiums.
The near-term implications for the technology sector are also negative. Many companies were relying on a significant pick up in orders in the final weeks of September to allow them to meet current expectations.
While this was unlikely to occur anyway, IT spending commitments will undoubtedly be postponed. The infrastructure destroyed in the tragedy represents around $1-1.2bn, not large enough to have a significant impact on order activity.
In the medium term however, as companies reassess budgets for next year, greater priority is likely to be given to disaster recovery, storage and security provisions.
The S&P500 is now more attractively valued relative to bonds. Earnings estimates for 2002, which were too high anyway, will have to be dramatically reduced. However, these reductions make it more likely that that we see an earnings rebound in 2002.
While investors will eventually view this as favourable, their valuation parameters will now also reflect a need for a higher risk for holding equities. We will be closely monitoring equity mutual fund flows over the coming months to monitor this.
The key to the equity market is how quickly the consumer can recover. With the forces of rising unemployment competing against $40bn in tax rebates and lower interest rates, consumer confidence was already finely balanced.
Now the effects of the tragedy and accelerated job cut announcements have to be added to the equation alongside increased government expenditure, fervent patriotism and yet lower interest rates.
Over the last week, the fall in the equity market has gone some way to anticipating the forthcoming negative newsflow on the economy and earnings. However, the equity market is still faced with the uncertainty of the nature and extent of impending military action and hence a low-risk approach to portfolios would seem prudent.
Further interest rate cuts.
Increased Government spending.
Patriotism strengthened by disaster.
Uncertainty over future military action.
Accelerated job cut annoucements.
Blows to consumer confidence.
Alison Wright is an investment manager at Britannic Asset Management
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