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Market commentary January 2009

By January 14, 2009No Comments

SUMMARY.  Recessions are not the end of the world, they are a process for sorting winners from losers, as the retailers have vividly illustrated.  For investors the greatest problem is that when markets begin to discount the economic recovery, whenever that might be, history tells us the bounce will be fast and furious.  So do not try and fine tune your timing, and position yourself sensibly, and in as low risk a way as possible, now.

P.S. next edition of TopFunds due shortly.  Please email to order a copy in the post.

The economic news of the last fortnight has confirmed that the world does not end with recessions, it merely sorts the weak from the strong, and this lays the solid foundation on which the next recovery is built. Adams, the childrens retailer, had been ailing for some time, Woolworths business model was irrelevant, Waterford Wedgwood has struggled for years and is heavily indebted. Then consider the well managed businesses. Sainsbury’s is creating thousands of new jobs following record sales over Christmas, Debenhams profits are up and it has cash in the bank to meet debts, and Next says it will meet profit forecasts.

Last time we referred to early signs of credit markets beginning to work (a prerequisite for stock market and economic recovery) and this has continued in the first days of 2009 with a flurry of new corporate bond issues being well received.

A further sign that the banking system is working would be more easily available credit for the creditworthy smaller businesses that began to receive letters from panicky banks in October threatening to withdraw facilities or sharply increasing rates. We expect a Government initiative, providing loan guarantees, later today. The smaller company sector dominates the employment market in the UK, not the larger and multi-national businesses that catch the headlines. A recession is when bad businesses go bust; in contrast a credit crunch, which reached out into the wider economy only in Autumn 2008, is when good businesses go bust because the banking system and credit markets don’t work. The authorities understand this but need to act fast, to stem the rapid downturn in unemployment (and confidence).

Turning to the stock market, when might we expect a clear recovery, taking us through 5000 on the FTSE 100 index and on towards 6000?

It can be argued that we are now into the ninth year of a bear market. Consider that the falls from 1929 bottomed in 1932, just three years. In this context, are the sharp market falls of the Autumn 2008 more likely to be near the middle or the end of that downswing (as self evidently it is not the beginning)? Fear is a powerful and fast-moving emotion, and it tends to occur at or towards the end of trends.

Nonetheless, a sustainable stock market recovery probably requires signs of stabilization in the US housing market (in addition to existing indications that credit markets are beginning to work again, and more initiatives to unfreeze bank lending). On housing affordability measures there is room for optimism both in the US and UK, and this will be taken advantage of as confidence slowly rebuilds.

The recovery will happen, markets first and economy second, it is simply a matter of timing. The greater problem for investors is that the recovery in markets could be fast and furious – history tells us that is highly likely, and there are huge sums of money (private and institutional) waiting on the sidelines. For example, in 1975 the UK market rose 140% despite the three-day week and a much less benign interest rate and inflation outlook.

Most people will not be able to fine tune timing. So for now the emphasis should be on investments with clear yield/income attractions, which provide a cushion until the bounce in capital values, whenever that might occur. This criteria is met most obviously by large high yielding businesses which are usually the focus of equity income funds, and corporate bond funds that appear to be ridiculously cheap right now. For those with the taste for a little more excitement, once the US economy appears to be steadying, it would not surprise if the greatest gains were in Asia (the US being a vital export market for Asia). Automatic drip feeding into your chosen funds has attractions – we can organise this for you.

Dennehy Wealth