Personal Finance: Sideline cash to cushion setback

THE ONLY surprising aspect of this week's dip in share prices has been that it did not happen sooner.

Markets had actually been trending down on both sides of the Atlantic for a little while. A correction of near 10 per cent had been achieved by the middle of the week - hardly the sort of move of which dives from the 52nd floor of a broker's office are made, but significant nonetheless.

It was all achieved with little fuss. The serious evidence - profit warnings, analysts' downgradings, and so forth, were already known. So what actually made the difference?

It was a respected market commentator who called the turn. Ralph Acampora, equity strategist at Prudential Securities and a noted bull, forecast an "interruption to the bull markets" - and that was enough. For one day at least.

The pressures in financial markets have been really quite remarkable. On the one hand nobody denies that valuation levels are extended. The so-called "Goldilocks" economic situation in the US (neither too hot, nor too cold) has led to sustained growth without overheating.

Of itself this is enough to justify some rather more extravagant price levels than those hitherto acceptable. But when you put this against a background of lower inflation and low bond yields, it is no wonder that people are prepared to pay more for equities. This situation is only exacerbated when supply is restricted by share buybacks and takeovers.

The most important single factor behind this sustained bull market, though, has been the build-up of cash. Money in the mutual fund industry in the US now exceeds that in the banking system.

If we need a model for stakeholder pensions in this country, we need look no further than 401Ks and IRAs (tax-advantage pension plans in the US). The investment cash these have created, and the resultant demand for shares, have helped keep the US market alight. Until recently that is!

The big questionmark is not so much what effect the implosion of the Asian economies will have on global trade, but whether or not this is of any relevance in terms of market pricing in the US and UK. In fact Asian investors are playing a surprisingly small part in the global money market scene. British holders of treasury bills now outnumber the Japanese.

Asians may have less money to spend, but they were only ever an important influence at the periphery of more esoteric markets, like high-value central London property, for example. Indeed the problems in the Pacific Rim have, if anything, driven money into the supposedly safer havens of Europe and North America.

But we cannot get away from the fact that many companies will make less money as a result of the past year's turmoil on the other side of the world. We only have to look at Japan to realise what a buyer's strike can mean - both in terms of consumer spending and investment patterns.

At present there is sufficient money sitting on the sidelines here and in the US to ensure that any setback is met by a healthy wave of buying, as those who raised money too early or delayed committing cash flow while the market continued to rise seek to make their positions look better. We really do have to decide soon what the right price to pay for financial assets should be.

Nothing has happened yet to suggest that the system will break down, but there are potential happenings that are not beyond the scope of our imagination, and which could ensure investors run for cover. This government, needing to expand its borrowing requirements, is but one, although in the end we all really dance to the tune of American markets.

Just for the present I think it is worth waiting to see whether we really have seen the end of the current tremors, or whether the bad news that will surely continue, will translate into a share buyers' strike.

Brian Tora is the Chairman of the Greig Middleton Investment Strategy Committee

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)

£350 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...

HR Business Analyst, Bristol, £350-400pd

£350 - £400 per day + competitive: Orgtel: My client, a leading bank, is curre...

Account Manager - (Product & Account Management, Marketing)

£26000 - £30000 per annum + Benefits: Ashdown Group: Account Manager - (Produc...

Training/Learning and Development Coordinator -London

£28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

Day In a Page

A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
It's the best of British art... but not all is on display

It's the best of British art... but not all is on display

Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
Critic claims 'I was the inspiration for Blanche DuBois'

Critic claims 'I was the inspiration for Blanche DuBois'

Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
Sometimes it's hard to be a literary novelist

Sometimes it's hard to be a literary novelist

Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

The woman stepping down as chair of the Heritage Lottery Fund is worried