No time to smelt down your shareholdings
You shouldn't sell, you could buy, but holding tight might be best, says David Prosser
Saturday 27 May 2006
Experienced City professionals like to pretend stock market investment is some sort of mystical art. And just occasionally, the mysterious rules by which they claim to abide look sensible rather than simply odd.
So it has proved over the past two weeks with one of the most long-standing City clichés: "Sell in May, don't come back until St Leger's Day." The saying is based on the theory that in the quiet summer months, share prices have a habit of drifting sideways or even down. The idea is that by staying out of the market between May and September - the St Leger's horse race at Doncaster is held early in the month -you can avoid this difficult period.
However, it's unusual for the theory to prove so practical. Yet since 1 May, when the FTSE 100 Index of leading UK shares was trading just above 6,100, close to a six-year high, the falls have been significant. By the middle of this week, after 10 days of serious setbacks, the FTSE 100 was below 5,600 - lower than at the start of the year and about 9 per cent off the peak.
The standard advice from fund managers and independent financial advisers - many of whom enjoyed bumper sales of stock market funds during March and April - is that investors should hold shares for the long term.
But even if you're in the stock market for the most long-term reasons - saving for old age, say - it's hard not to be worried when the value of your portfolio falls by almost a tenth in the space of a couple of weeks.
In simple terms, there are three possible reactions to the market turmoil of the past fortnight. If you've been unnerved by the setbacks on the London Stock Exchange and other global markets, you can sell some or all of the equity holdings you own, or move into more defensive shares. Alternatively, you could look at share price falls as an opportunity, and add to your stock market exposure. The third option is to ignore the events of the past two weeks altogether.
Stock market experts are unanimous in the view that the first of these options would be the wrong strategy. Doug Naismith, managing director of European personal investments at Fidelity, the UK's biggest fund manager, says investors who try to second-guess stock market movements invariably get it wrong - whether they're professionals or amateurs.
"It is impossible to be sure how the markets are going to move," Naismith says. "If an investor has decided a particular fund is right for them, they should go ahead and invest."
Fidelity's research suggests market-timing mistakes can be very costly - especially being out of shares at the wrong time. An investor who put £3,000 into a fund tracking the UK stock market at the beginning of 1996 would have had a holding worth £6,418 by the end of last year. But missing out on the 10 best days for the stock market over that 10-year period would have reduced the final total to only £4,263.
If Fidelity is in the hold camp, other advisers are already suggesting the setbacks are a buying opportunity for the brave.
James Dalby, head of fund propositions at Norwich Union, says his investment team has been very encouraged by the correction of the past 10 days. The insurer is in the middle of launching a new Special Situations unit trust, so it might have been expected to be frustrated by the timing of the setbacks.
"Far from being bad news, recent market falls have seen fund managers identifying excellent buying opportunities - many good-quality stocks have been over-sold and are available at very attractive prices," Dalby says."One of our managers has compared the situation to being like a child in a sweet shop."
Certainly, most experts think share prices will not end the year lower than current levels. All the experts consulted by Save & Spend (see below) predict the FTSE 100 will recover over the coming months, albeit modestly in some cases.
Two issues underlie current stock market uncertainty. The first is concern that interest rates are set to rise, particularly in the United States, which would damage the prospects for strong global economic growth. In addition, the price of commodities has fallen sharply in recent weeks. Until now, the commodities boom has been boosting many of the world's biggest companies.
As yet, however, investment analysts are reluctant to concede that these issues are serious enough to drive share prices further down.
"After posting gains for the past 15 months, investors may be wondering whether the latest jitters could lead to a mini bear market," says Gil Knight, manager of Gartmore's US Opportunities Fund. "We prefer to see the recent pull-back as a mere market correction since the fundamental economic picture in the US remains quite positive," she adds. Similarly, while Edward Bonham Carter, the joint chief executive of Jupiter Asset Management, says the correction could last into the summer, he claims not to be worried. "It is not surprising for markets and, in particular, for sectors such as mining to correct after such a long run," he says. "We still prefer equities to bonds and unless interest rates increase substantially from here, this is unlikely to change."
Richard Urwin, the head of asset allocation and economics at Merrill Lynch Investment Managers, completes the set. "It's still too early to go defensive," he says. "The global economy still enjoys fairly benign conditions and we also forecast a positive outlook for commodities."
Such confidence from people who depend on investors for their livelihoods is to be expected. But Naismith says the most important thing to remember is why you were investing in the first place: "The secret of successful investing is to devise a plan and stick with it over the years."
His colleague at Fidelity, the hugely respected fund manager Anthony Bolton, also has a warning for investors - that some of his peers in the industry may be downplaying the risk of remaining in the stock market over the weeks and months ahead.
Bolton was one of the few investment professionals to predict this month's setbacks. Last month, his investment trust took out a put option - a derivative contract that produces profits in the event that the underlying asset falls in value - on the UK stock market. The exact details are not known but it has proved a profitable gamble for Bolton.
For now he remains cautious. "The correction could take months rather than days," Bolton told a conference at the Securities Institute earlier this week. "I think it could be the end of the bull market."
This warning does not undermine the case for long-term investors maintaining stock market exposure, but it will be crucial to hold your nerve if the downturn lasts longer than many expect.
Where is the market headed?
* Khuram Chaudhry, a quantitative strategist at Merrill Lynch, is the most pessimistic of the experts we asked to offer a forecast for how share prices will perform to the end of the year. "The consensus of sell-side strategists based on Reuters' quarterly poll is in the range of 6,450 to 5,300, and I would be positioned close to the bottom of the range," he says.
* Mike Turner, head of global strategy at Aberdeen Asset Management, expects blue-chip shares to recover from the low point of around 5,500 hit this week, but not to regain the year high of 6,132. "Our target for the FTSE 100 for the year-end is 5,850," he says.
* Crispin Finn, a UK equity portfolio manager at Credit Suisse Asset Management, is more positive. "Remembering how far the market has risen over the past three years - from around 3,500 to 6,100 - a setback of 5 per cent is not too worrying," he says. "We stuck with our year-end target on the Footsie of around 6,000 after a strong first quarter and continue to take that view."
* Stephen Whittaker, joint chief investment officer of New Star Asset Management, is the most optimistic. He predicts the FTSE 100 will recover to 6,350 by the end of the year, around 4 per cent up on the high point achieved last month.
Shares to back if the downturn continues
In any stock market correction - even a prolonged down period for share prices - some stocks do worse than others. For investors not expecting share prices to recover in the coming months, we asked the experts to pick five shares that will stand some chance of making money.
* British American Tobacco: Richard Hunter, head of UK equities at Hargreaves Lansdown, says the cigarette manufacturer is a good bet in a recession. "The shares will continue to benefit from the inelastic demand of smokers," Hunter says. "In other words, rising prices do not put smokers off buying BAT's products, and nor do tougher economic times."
* BP: "This is probably the most favoured of the oil majors at the moment," adds Hunter. "Production is set to increase at the company and a large share buyback programme is now in full swing." The booming oil price has also boosted profitability at the company.
* BT: Ted Scott, the manager of Foreign & Colonial's UK Growth and Income Fund, says that with decent dividends, BT has merits as a defensive share, but he argues that the company's growth potential has been underestimated. "I think the market is missing the point about BT by concentrating on the consumer services department which is getting smaller and facing challenges," he says. On the other hand the company's wholesale division is performing very well, Scott points out.
* Tesco: Supermarkets are good defensive buys for investors, because their customers buy basic foodstuffs whatever the economic climate. "Tesco is strong and cash-generative," Hunter says. "It is looking to international expansion and is increasingly diversified in terms of its product offerings." A move into the US is a risk for the management, but the company has performed incredibly strongly in recent years.
* United Utilities: Defensive shares traditionally tend to lag behind the rest of the market during stable economic conditions because demand does not increase as dramatically. Such shares make good investments in more difficult times - utilities are a good example, because people's need for power and water is not altered by their wealth. "United Utilities is stable, cash-generative and offers a whopping yield," says Hunter.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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