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By Richard Hunter, Hargreaves Lansdown
It is said that the biggest word in the English language is "if". So - if we have now marked a final low for the 2008 global financial crisis - and if a line can now be drawn in the sand after coordinated global governmental intervention - where do we go from here? Such interventions have, of course, been well publicised. We have seen shifts of monetary, fiscal and regulatory policy, capital injections of incredible size, and a new world order in financial systems. The initial hope - of removing the logjam in credit markets - is by necessity something which could return, although this will not be overnight. Similarly, the first tangible results of the US bailout programme, or TARP (Troubled Asset Relief Programme) are not likely to be seen until the end of this month at the earliest, and may even roll over into November. Global markets are currently undergoing something of a relief rally, with an 8% rise in the FTSE100 on Monday being followed up with (as I write) a further 6% rise on the Tuesday. However, it is probably too early as yet to hang out the bunting - the FTSE100 remains 30% down in 2008 (and 37% over the last calendar year). One of the main reasons for this, even though in media headline terms, it has very much been pushed to the sidelines, is the current state of the global economy. There seems to be a general view that 2009 will be an extremely tough year economically in most developed areas of the world, whilst the imminent third quarter earnings releases from the US will assume particular importance in gauging prospects in the near term. In the UK, a recent raft of weak economic figures tends to support the view that the current slowdown could tip into technical recession, although this in itself could present opportunities. For example, even though the latest release has shown that inflation rose to a 16-year high of 5.2% in September, this had been anticipated by the Bank of England, and indeed it would appear that many of the inflationary pressures are actually now in retreat. This would tend to fit in with the current view that even after the exceptional rate cut to 4.5% in the UK last week, more are planned - and perhaps even more aggressively than many are actually expecting. Amidst the turmoil of the last year or so, a quick glance at the FTSE100 performers is an interesting exercise in determining whether market theory has held - such as the performance of the defensive stocks - and given an uncertain outlook, which could combine to support the notion that now may be the time to be dipping into the market selectively, with a longer term view in mind. It is indeed worthy of mention in troubled times such as these that equities tend to perform better over a period of time and, the power of compound interest (by reinvesting dividends into the underlying shares) can have a dramatic effect on share prices. As an aside, this is one of the reasons for some disappointment from holders of bank shares, which usually form part of an investor's core portfolio and where in some cases, it seems unlikely that dividends will be paid in the foreseeable future. In absolute terms, just two FTSE stocks have produced a positive return over the last year - the classically defensive British Energy (helped along, of course, by the EDF approach) and Stagecoach (a move towards public transport, perhaps, in the face of record oil prices) - where the share prices have risen 26% and 2% respectively. In relative terms, there are a whole host of stocks which have managed to "beat" the overall FTSE performance of -37%. Within this list are a number of defensive stocks which have managed to withstand some of the current downturn - such examples include BG Group (-5%), British American Tobacco (-10%), the extremely resilient HSBC (-11%), Compass Group (-12%), Reckitt Benckiser (-12%), AstraZeneca (-14%) and William Morrison Supermarkets (-21%). All in all, "if" the box has now been ticked and the real financial crisis averted, then investors' minds will turn back to looking at economic prospects. Whilst these might not look particularly pretty at the current time, there is yet the possibility that longer-term investors could be handsomely rewarded for selecting high quality, cash rich and lowly geared blue chip companies at entry levels not seen for some considerable time. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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