Insulated Britain may avoid worst of collapse

Stock Crash: For City worker and those who bought Isas last year the situation is grim. But it will not affect most investors
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The Independent Online

The latest slide in the value of the London stock market should not cause alarm for the man in the street - that is unless he works in one of the City's big investment banks.

The latest slide in the value of the London stock market should not cause alarm for the man in the street - that is unless he works in one of the City's big investment banks.

Stock markets are forward looking, so the repeated falls we have seen in the prices of London shares this month spell out a negative message: that the US economy is set for a recession, and the profits growth of British companies - which are now international businesses - is going to slow.

But there are many reasons for the man in the street to feel relatively relaxed. In the US, almost half the population have money invested in the stock market. Last year, US investment in stocks and shares overtook investment in property. American investors who have seen the value of their investments tumble are far less likely to order a new car or buy a new phone - and that hits the domestic economy hard.

In the UK, only 25 per cent of the population own shares, often in the form of longer-term investments such as personal equity plans (Peps). So the impact of falls in the stock market on consumer spending, and the wider economy, is less marked.

Khuram Chaudhry, a UK strategist at investment bank Merrill Lynch, says: "There will be nothing like the slowdown here that we will see elsewhere, because the average investor is not tied into the stock market through direct investment."

The British Government's aggressive stance on taxing energy means that the UK is far better prepared to cope with another factor behind the US's difficulties, higher oil prices. Britain is also relatively insulated from the cutbacks in spending on technology that have caused so much concern in the US. We are greater consumers of technology than we are producers.

That is not to say there will not be an impact in some sectors, such as software and, in particular, financial services. "The man in the street should not be too worried," says Jason James, a European strategist at HSBC. "It's us lot, people in the City, who will be worrying. There could be an effect on London house prices in the areas where City workers live, like Islington."

Mike Young, a strategist at Goldman Sachs, says: "People in my part of the world are miserable gits when they see this happening. But for the man in the street, things will only get a bit worse, not a lot. Sure, the job market will get less bouyant - but only from the best it's been for a long time."

For people worried that falling share prices will wreck their pensions, which are invested in stocks and shares, there is little cause for panic either. Patrick Connolly, associate director of Chartwell, a firm of independent financial advisers, says: "If you are some way to retiring there should be enough time for your pension to recover, as everyone expects the markets to go up again.

"And if you are within five years of retiring, probably only 50 per cent of your at most is in equities [shares], with the rest in bonds and cash, making your investment safer."

Mike Young, of Goldman Sachs, says this could be a time for some people to top up their pensions. "If you're a long-term investor, a market downturn is an opportunity. For many companies, their long-term prospects are better than ever." Among long-term investors feeling the most pain are those who took out Individual Savings Accounts (Isas) - the most popular form of private investment in Britain - last year. Mr Connolly said: "A lot of people jumped in at the height of the technology boom last year and lost a lot of the value of their fund. Now they want to jump ship, but that would besell at the bottom after buying at the top."

As well as affecting the value of investments such as Isas, the market downturn has put private investors off buying the products. Isa sales are more than 30 per cent lower now compared to the similar period last year.