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31/10/2008 - The Week in Focus

Markets seemed to turn a corner last week – just as private investors decided the time was right to sell out. The pattern is a familiar one: The FTSE 100 rose nearly 12%, while IMA statistics showed net redemptions of £21m for equity-based funds for September. This compares to an overall investment of £886m in September last year, when the markets were much higher and demonstrates once again investors have learnt little from history.

Part of the problem is the stockmarket and private investors are looking at different things. The markets were encouraged by the US cut in interest rates, which took the overall Fed lending rate to 1% – its lowest level in four years. At 4.5%, the UK rate looks impossibly high by comparison and, with real signs of weakness emerging in the economy, plus a fall in eurozone inflation to quell any lingering fears among central bankers, a further cut in rates could be on the cards this week.

Markets also drew solace from signs that cash-rich corporate buyers are increasingly happy to pick up companies at what they see as bargain-basement prices. Porsche’s bid for VW stole the limelight but other M&A activity included BSkyB’s move on Tiscali, while BA and Rio Tinto’s plans were temporarily thwarted by market conditions and the regulators respectively. Barclay’s £5.8bn refinancing also came off and, while this meant not ceding control over its operations to the UK Government, shareholders were left wondering what price they had really paid to bring in Middle Eastern investors.

But while markets found reasons to be cheerful, private investors were focusing on headlines that showed rising unemployment, record falls in house prices and sliding consumer confidence. It will take more than a small increase in mortgage lending and the prospect of further rate cuts to get the marginal investor interested in equity markets again. By then, of course, the market will probably be riding high.

For those of you with any sympathy to spare, it was also a tough week for the hedge funds. Estimates for losses on the VW bid were as high as £18bn as the move confounded plenty of short sellers who had been banking on embattled VW failing and were stung by the rapid rise in the share price – 348% in just two days. The cracks in the hedge fund world were evident as, for example, the £4bn Polygon hedge fund suspended redemptions to prevent any more investors rushing for the door.

The media hasn’t exactly helped private investor confidence – trumpeting falls in pension funds and 'the end of equities'. But ultimately, this last week has demonstrated how quickly markets can recover given a bit of good news. Although markets are likely to remain rocky in the short-term, long-term private investors could stand reminding they ought to be bargain-hunting rather than selling.

marketing-hub.co.uk

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