William Kay: In this rumbling bear market, fear has begun to take over from greed

Like a Beethoven or Wagner composition building to a climax, the bear market crashed and thundered again this week, with the only consolation being that fear is beginning to take over from greed as the dominant emotion.

Money net

Like a Beethoven or Wagner composition building to a climax, the bear market crashed and thundered again this week, with the only consolation being that fear is beginning to take over from greed as the dominant emotion.

This is an essential condition for the bear to enter its death throes and eventually pave the way for recovery in share prices. But it could still be a long time dying.

Hugh Hendry, hedge fund manager at Odey Asset Management, said: "It could be the biggest bear market of all, and it has a symmetry in following the greatest of all bull markets." While that would be a neat pattern with an almost Biblical air of seven fat years preceding seven lean years, it can be misleading to place much faith in such possibilities until long after they have happened.

The 33-month downturn since the all-time peak has been characterised by analysts and pundits of all shades pointing to one potential similarity or another with 1987, 1974 or 1929, whether it be the duration, the depth or the impact on yields and price-earnings ratios. But Mark Twain probably got it right when he said: "History doesn't repeat itself. At best it rhymes."

This is not 1987, 1974 or 1929. It is 2002 and we are entering new territory. That is scary enough in itself, without trying to be clever about where the bottom is and when it will be time to buy again. As I have said, it is best to ignore timing and keep trickling money into the market, with diversification from shares to bonds to spread the risk.

On the opposite page, Colin McLean offers the useful advice that investors should concentrate on the basics of company performance: cash generated, tax paid, upward sales and profit margins. That strategy would not get you far in a raging bull market, but it is right for the present conditions.


The latest rumblings from the life insurance industry suggest a volcano is about to erupt. The question is whether policyholders or shareholders should prepare for avoiding action.

This week AMP, the Australian group which owns Pearl and Henderson Global Investors in this country, lost its chairman and its chief executive after admitting Pearl has breached its minimum capital requirements due to the slide in the stock market. That may be a one-off. More worrying is Standard Life's warning that it may have to penalise policyholders who want to cash in early, and Prudential's closing of its staff's final-salary pension scheme to recruits.

These are outward signs of deep inner turmoil and considerable concern from organisations whose reputations are founded on measured control in the face of almost any circumstances.

We are seeing the impact of the modern regulatory climate, with its emphasis on disclosure, as compared with the regime that prevailed in 1974. Given that the stock market then fell by three-quarters from peak to trough, it is certain some insurance companies were technically insolvent and their pension funds were billions of pounds in deficit on their future liabilities.

But, only seven years after a devaluation of sterling in which newspapers were forbidden from mentioning the D-word before the event, the guiding principle in 1974 was to say nothing of these problems in public, for fear of panic. While the Bank of England could not avoid launching a public lifeboat for banks, it keep quiet about its efforts to prop up the insurance industry. That is not an option today, thanks to the requirements of the Financial Services Authority (FSA) and the FRS17 accounting standard.

History will judge which is the better method of ordering the financial affairs of major corporations, but there is a clear risk that further significant market falls will gather pace at a frightening rate as insurers and others are forced to sell. That could be the regulators', and ultimately the Government's, most severe test.


The present market backdrop makes this an exceptionally interesting time for Anne Bradley to be unveiled as consumer director of the FSA. Ms Bradley, who starts in January, comes from the National Consumer Council and succeeds Christine Farnish, now chief executive of the National Association of Pension Funds.

But the Bradley reign will be markedly different. Ms Farnish valiantly struck out at the industry's inertia, complacency, user-unfriendliness and refusal to abandon arcane language to describe its products. Ms Bradley is more concerned to improve education, information and advice and, in her words, "To put the consumer at the heart of the FSA".

Although the FSA has a legal obligation to foster financial education, this is a potentially vaguer end of its remit. It can set rules for professional participants in the market, with penalties for misbehaviour. But it cannot force education down people's throats, however desirable it may be to have an informed population of consumers. And it is.

Ms Bradley knows financial services are still a big area of consumer detriment, and the FSA has the clout to make financial education a firm pillar of the national curriculum.

The gap, which will take many years and much effort to plug, lies in those who left school financially illiterate. They will gradually be replaced by school-leavers who will, year by year, become more demanding and hopefully less gullible. But the FSA cannot march adult illiterates back to the classroom, so it must be much more imaginative about reaching them.

As I wrote last week, the latest FSA booklet on shopping for financial products and advice is a laudable effort which largely misses the mark because it is still pitched at too high a level.

Ms Bradley has encouraging plans to work with such organisations as the National Association of Citizens' Advice Bureaux and the Debt Counselling Service to remedy the shortcomings, and her experience at the National Consumer Council and Consumers' Association will have given her some necessary insights. I wish her well.


William Kay is personal finance editor of 'The Independent'

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