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Market commentary March 2007

By March 5, 2007No Comments

This month we focus on some rather minor stockmarket falls, and the extreme reaction from the media.  Private investors should not get distracted by this side show, and focus on their own objectives, timescale for investment, and attitude to risk.

P.S.  If you are considering an ISA for this tax year, but want to take more time to consider your fund choices, send the application and cheque to us in the normal way, and opt for “Cash Reserve”.  This ensures that your ISA is in place for this tax year, and that your capital is secure and earning some interest.  This is a temporary home within your ISA, while you consider the range of fund choices in the weeks and months ahead.

Returning to the market commentary, right at the end of February the Chinese stockmarket and Alan Greenspan conspired to spook markets.  Even the usually balanced FT had ghoulish headlines.  On Thursday 1st March the main US stockmarket indices slipped 0.3%, barely a ripple.  On the following day the FT managed to contrive the headline “Trading frenzy takes its toll on markets across world”, accompanied by over-sized picture of a suicidal-looking trader, head in hand.  There was similar nonsense in most national newspapers and TV and radio reports, yet as we write the UK stockmarket is less than 3% from its peak earlier in 2007, which is no more than the ebb and flow of markets.

Let’s try and get this in perspective.

The very small, inefficient, Shanghai stockmarket had performed terribly for a number of years, despite a booming Chinese economy, and booming shares of Chinese companies quoted in Hong Kong and outside China.  Long overdue reforms of the Chinese stockmarket were introduced earlier in 2006, and a huge volume of Chinese domestic investors joined the global stockmarket party that had been rolling since 2003.  But it went too far too fast, and from being the worst stockmarket of 2005 it became the best of 2006, more than doubling.  In that context a 9% stockmarket fall in China (triggered by rumours that there would be a clampdown on illegal activity and profits would be taxed, which is hardly revolutionary) should not be a surprise, and it tells us more about the gambling instinct of domestic Chinese “investors” than it does about the (continuing) strength of the Chinese economy.

What did Greenspan say?  That it was “possible” that the US would end the year in recession.  So what’s new?  Ben Bernanke, current head of the US Federal Reserve, sought to calm nerves by confirming that their economic growth forecast was unchanged, in essence forecasting a slowing down in the 1st half, and a speeding up in the 2nd half.

What this is really all about is a significant proportion of the crowd of global investors being aware that they have had a good run.  There would be no problem if they made the perfectly rational decision to gradually take some profits, adjust their portfolios to lower risk asset classes, buy portfolio insurance, reduce borrowings or whatever.  But crowds are not rational, and the most exposed part of this crowd, such as the hedge funds investing with borrowed money, are ultra sensitive. To long term private investors, like yourself, this is just a sideshow.

This was our guidance back in January, in the TopFunds Guide:

“We have little doubt that during 2007 some event will trigger a fall in stockmarkets, perhaps 10% or more.  Unfortunately “fall” continues to be associated in investors minds with the very ugly 50% drop of the 2000-2003 bear market, and this recollection will prompt panic selling amongst some investors.

To stop yourself being sucked into this mental maelstrom during 2007 try and focus more on the falls of 1994, 1997, 1998, which were 20%, 13% and 25% respectively.  These are what a long term investor should expect to encounter with some regularity within a long term stockmarket uptrend. Such corrections are nothing more than interruptions to a larger upward trend, that tend to present superb buying opportunities, as they create the foundation for the next upward leg.”

Dennehy Wealth