The bears that have been hibernating in the London equities markets these past few months seem to be rousing themselves at last. Last week the FTSE 100 index of leading stocks dipped below what market commentators insist on calling the “psychological” 6,000 mark, its lowest level since 1999, while the US shows far greater nervousness ahead of an anticipated further cut in interest rates.
Not a full-grown bear market yet, but a bear-cub market possibly. The question now is what level of panic will grip the equities markets. If investors really lose their nerve, stock market values could be driven far lower than need be, triggering a loss of corporate earnings which, in turn, pushes European economies into unnecessary recession.
Institutional investors should know enough about those fundamentals to hold their nerve. I wouldn’t want to tempt fate, but the kind of meltdown that we witnessed in global equities in 1987 should now be the stuff of market history. Not only are our markets run more professionally these days, but the technology at our disposal actively conspires against a run on equities building up its own momentum. The days of yelling “Sell!” in a red mist down the telephone have gone, along with the paper memorandum.
But the retail market – private punters like you and me – is a different matter. This is where talk of sentiment and psychology carries some weight. It is why the US stock market, which has a high proportion of stocks in private hands, is horribly vulnerable to a switch from an investing to a saving economy.
Nor should the inability of George W. Bush to engineer a soft landing for the American economy be underestimated. And, once the American population has lost confidence in shares and starts selling into a falling market, then the cub will have grown into a full-grown grizzly.
Over here, we don’t have anything like the retail market in equities that the US depends upon. It was only the privatisation programme of 20 years ago that started to push equities significantly into private hands. But there is some talk in the markets that the British private investor has taken fright at the prospects for equities and is shunning the stock market.
Such evidence was offered by the snappily-named Association of Unit Trusts and Investment Funds (Autif) at the start of this week, a report that will have been in high demand from a rapidly consolidating and worried retail banking and insurance industry. Autif’s figures show that Individual Savings Account (ISA) sales are down about five per cent on last year.
That is believed to be an underestimation of the depression in this market, precisely because last year’s figures were somewhat undercooked. Fund managers themselves believe the ISA market could be off by as much as 30 per cent, and independent observers are saying that, if that’s what the fund management industry is admitting to, then the sales drop could be as bad as 50 per cent.
This looks like a portent of doom for the financial services industry. But before marketing managers at high street banks start looking for jobs in the packaged goods industry, let me say that I don’t believe that the situation is nearly as bad as it looks from Autif’s report.
The first point to make is that technology funds, which could apparently do no wrong this time last year, not unnaturally accounted for nearly one-sixth of the total ISA market last January, which is the period under Autif’s examination. Equally unsurprisingly, such funds account for hardly five per cent of January 2001’s total sales of £637m. Taking this into account, what we are not witnessing is a wholesale abandonment of the retail equities market, but a long-delayed readjustment to the absurd stock market bubble that was created in the first half of last year by the dot-com craze.
Secondly, January is not the most significant month in the ISA season. It may be the ISA market’s becomes most visible, because it’s when the major financial operators roll out their advertising campaigns, but it’s not the critical sales month. The ISA’s appeal depends substantially on it being a mass-market, tax-break vehicle. This means that, in a year when punters are not jumping at the first dot-com weighted technology fund that comes along in January, the bulk of the sales action is going to be during March, to beat the end of the tax-year deadline in early April.
Thirdly, the UK financial services industry is unlikely to take anything like the hammering of its US equivalent by the retail market becoming averse to stocks. It’s true that execution-only brokerages such as Charles Schwab are laying off staff on both sides of the Atlantic – a sure sign that times are hard in retail equities – but the next-generation of online financial services providers, such as interactive investor, Fidelity and Egg, are essentially financial supermarkets. They offer access to a range of products, including cash and savings vehicles as well as equities investments.
It was the so-called day-traders that caused the loopiest of excesses in the US retail financial markets. Those days are gone, along with most of the day-traders. For once, we can take some comfort in the UK that we’re rather more risk-averse than our American cousins and enjoy a broader-based financial services market. We may not make as much on the way up, but we sure as hell won’t lose as much on the way down.
George Pitcher is a partner of issue management consultancy Luther Pendragon