With the FTSE 100 and FTSE World Indices down around 25% in 2002 and the FTSE Investment Companies i...
With the FTSE 100 and FTSE World Indices down around 25% in 2002 and the FTSE Investment Companies index falling by nearly 30%, it was another difficult year for equity investors in general.
Global equity markets have fallen for three years in a row, a record since the Second World War and defying those pundits who argued a year ago that 2002 would mark the end of the bear market.
2000 and 2001 had marked the first two-year decline since the 1973-74 bear market, so very few investors thought the pain would intensify. Yet markets have suffered even bigger falls in 2002 by and large, than in 2001, with major indices showing losses of between 20% and 40%.
With the benefit of hindsight, it is easy to see why last year failed to build on the market bounce that occurred in the final quarter of 2001 following 11 September. Continuing corporate scandals, fears of the world's three largest economies slipping back into recession and growing geopolitical risk were among the principal culprits.
But looking at the big picture, what happened in 2000, 2001 and 2002 was the inevitable reaction to the phenomenal bull market that marked the closing years of the twentieth century.
Investment returns had become divorced from fundamentals, and the technology boom helped to ensure that the bust, when it came, would be deeper and more protracted.
It is logical that market returns over the very long-term should return to a realistic level consistent with trends in the growth of the global economy and company profits. The longest bull market in history had to be followed by a painful and protracted period of adjustment, allowing the market to revert to its long-term mean investment return.
While it is true that equities look cheap against (albeit very low) bond yields historically, they are not that cheap on measures like P/E ratios.
There is very low visibility in forecast earnings for 2003 due to the continuing uncertain economic outlook and the equally uncertain geo-political outlook with the growing likelihood of war with Iraq, the worsening situation in North Korea and further large- scale terrorist attacks.
Even after losses of one-third to one-half in major world stock markets since their peaks, it is too early to have conviction that corporate earnings upgrades will outweigh downgrades in the near future.
The investment trust sector has been even more adversely affected on the way down by gearing, exposure to smaller companies (which have underperformed) and widening discounts in specific sub-sectors such as European, smaller companies, technology and venture capital trusts.
As and when the global economy recovers and corporate profits are upgraded, some of these factors should reverse, helping investment trusts to rise even more than the broad market.
In 2002 it has been encouraging to see investment trust boards exercising strong corporate governance, examples of which were Edinburgh Investment Trust and Merrill Lynch UK whose investment mandates were awarded to Fidelity and Invesco Perpetual, respectively, after an open tender.
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