Up to last Thursday, it all made sense, even with all the falls. After that the whole thing became barmy and investor sentiment has taken over into full on fear, with stocks like Standard life trading up one day at near £3 and then down to near £2 two days later.
This just does not make sense. I open up in the morning and Standard life is down 12%. I pop to school to drop the girls off and come back at 9.05 to find them recovered by 10%. Why do I pick Standard life?
They are a massive organisation with considerable resources, but the selling is clearly indiscriminate. When all those around you are going mental and losing their heads, it’s time to look at the realities.
Bargains are definitely out there and the indiscriminate selling will now create opportunities that will be obvious at a later date, but less obvious now, with the markets in turmoil mixed with potent emotion.
What are the likely upsides? The government’s intervention in banks should lead its way to banks gaining confidence in each other and opening lines of credit, but don’t expect that to happen too soon, with news after news of failing institutions. This will need to settle. Not every bank is highly leveraged (definition: borrowed irresponsibly). HSBC is known to be highly liquid, but I suspect will be unwilling to lend to other banks in the current climate until it sees a floor. The outcome can easily become very bleak indeed:
Companies cannot refinance so they go pear shaped, unemployment increases so taxes have to increase. In the meantime your shares in your pensions are under pressure as companies are making less profits and your savings plummet. A method of recovery is to lower interest rates thereby reducing your income and the rest is, well, just very boring.
Personally I saw most of this coming with articles in 2003 saying that the housing market was a bubble then and mid this year focusing on what was happening with inflation.
So for any good news?
I believe we will have further drops in interest rates and they will be sharp. I forecasted 4% last year but I think it may need to go as low as 3% to stimulate the economy. In the meantime the traders in speculative commodities such as oil, food etc have had a torrid time and whilst this is having a real impact on energy stocks in the FTSE, it is easing inflationary pressures at a rapid rate. So expect the cost of living to fall dramatically (hampered I expect by tax increases). Expect prices at the shop to fall too and expect your mortgages to be a lot lower than they are. A fall from 5% to 3% would be a 40% drop in expenditure.
In the meantime the government’s intervention with banks may well have made their currency a lot weaker but this can be good. A weaker currency means we stay in the UK more and spend our money here but also we are a lot more attractive to overseas tourists. Manufacturing can also be buoyant as the cost of exports can be cheaper because of the currency differences.
Do I believe property will bounce? Not a prayer, not a sniff of a prayer. This one is for the long haul and will match the last one in the 90s when the market was flat for nearly six years. There are 870,000 empty properties in the UK and that’s before most of the building sites are finished (if they ever will be).
Whilst some may class that as doom and gloom, I am unemotional about the reality this situation will create. It was a bubble and it’s the same people talking it back up again as we speak.
There will be plenty of pain to come but next year will see some buds on those roses. Choosing them will be all about your ability to pick the right opportunities.
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