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Monthly commentary August 2011

By August 9, 2011No Comments

SUMMARY  The UK stock market is headed towards our target of 4800 as we write, and the global markets are falling in tandem. It is time to start building a shopping list as outstanding opportunities arise. How far might markets falls? What action should investors take now?

Back in April said the markets were having a “cartoon moment”, running out over the edge of the cliff, in a Road Runner fashion, only to fall when (eventually) investors looked down. Well in the last few days investors looked down, and reality is biting hard. The economic numbers have been appalling for months in developed economies, and bond markets have been sending out a strong warning, largely ignored by equity markets until this week.

There are three linked problems. A debt crisis of developed economies (not just the eurozone), the likelihood of a recession (implying equities falling 40% from peak to trough in the US), and growing risk of a banking crisis akin to 2008. And it is very unclear what ammunition governments and central banks have to deploy.

As you know, we have targeted 4800 on the footsie for some months, and as we write we are heading fast to that level. No one knows if the falls might end there, that is simply an obvious technical support. A long time favourite indicator, the gap between the index and the 200 day moving average on the footsie, also targets 4600-4800.

If you haven’t already tactically adjusted your portfolio, de-risking to some extent, there is probably little point in panic selling now. Your time is now best spent building a shopping list of opportunities. Then build a plan which involves dripping money into your shopping list over a few months, a facility available through our Wealth Management Platform (or wrap).

Events in the US (a downgrade of their credit rating from AAA to AA+) dominated the news media. But the reality was that this was, relatively, a little local difficulty. The main focus of concern is still a financial crisis in Europe. Spain and, in particular, Italy were growing concerns last week, and before stock markets began to collapse we identified clear signs of the “smart money” getting out early last week.

As we cover in the latest edition of the TopFunds Guide, we are confident that the US will eventually deal with their problems – as Churchill said, you can rely on the US to do the right thing, though not until they’ve tried everything else. But this probably won’t prevent their suffering a recession. On the other hand problems in the eurozone are far more intractable, political risk is rising, and it is difficult to foresee what the solution might be, let alone when it might be.

More positively, if you have been following us, you should be reasonably immune from these events and can look forward to outstanding, and rare, opportunities. As ever, we will keep in touch.

Dennehy Wealth