The prospect of military action by America and Britain has caused world indices to zigzag to new low...
The prospect of military action by America and Britain has caused world indices to zigzag to new lows recently as nervous investors have traded billions of shares. Not surprisingly, financial markets have had plenty of nerve-racking days since the appalling attacks on the US and we are likely to see more.
Until recently, commentators were divided over whether the US economy would fall into recession. US consumer spending had held up relatively well amid the economic downturn and people were hoping this would pull the economy through. However, there were signs in August that consumers were starting to spend less and this has been underlined by the recent rise in the personal savings rate.
The terrorist attacks will serve to exacerbate the trend that was already in place. Corporate visibility is still poor and there will be more profit warnings in the coming months, such as those seen recently from EMI and Compaq. As a result, investors will have to be very careful in selecting the individual sectors or companies in which they invest.
As an obvious example, the shares of airlines and insurers have already taken a battering, although support packages from the White House and the British Government may promote some stability and security in the airline industry.
Insurers, on the other hand, are going to be hit by increased claims. Their rates will undoubtedly rise but in the short term they may not rise fast enough. In the longer term, they may find enhanced profitability.
Elsewhere in the financial sector, mortgage banks are likely to be safer stocks, for the moment, than banks with commercial exposure that will suffer in a global recession. Certain property companies may also offer some predictability.
The events of the past few weeks will undoubtedly affect investor's appetite for risk so we have cut our small-cap exposure in the Jupiter Portfolio Service. People seem to give up on small caps in troubled times. In the late-80s recession, everybody gave up on them. Brokers didn't cover them and the market makers did not quote them. In times of trouble, investors want visibility, which the small-cap sector may find difficult to deliver.
Hedge funds should perform well in the months ahead as they already have during the difficult markets we have seen this year.
In a perverse sense, current market conditions will be positive if they make people think rationally about this asset class.
From a macro perspective, central banks have been very aggressive in cutting interest rates and flooding liquidity into the market to keep economies moving and bolster confidence, so the outlook is not all doom and gloom. History tells us that markets eventually recover. Indeed, bear markets create opportunities and the seeds of the next bull market are sown in their convulsions.
Don't forget that decent companies will have been dragged down with the negative sentiment and for them, now is a great buying opportunity.
Overall, there will be opportunities in the markets for individual fund managers who have the skill to see the opportunities and are nimble enough to take them. Fortune favours the brave.
Bear markets create opportunities.
Hedge funds will defy critics.
Individual managers should add value.
Earnings outlook is bleak.
US consumer confidence wanes.
Small caps may underperform.
John Chatfeild-Roberts, director at Jupiter Asset Management
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