In my final column of last year, I wrote that “we have waited long and with trepidation for a major correction in the US equity markets and economic circumstances conspire to make it almost an inevitability in the coming year. Sometime early in the second quarter would be my guess.” (MW December 21).
Okay, so it’s not yet the end of March. I was slightly off there, but we should remember, and Bill Clinton might confirm, that coming early is a very American thing to do, in every important regard except war. The polite version is the old saw that the rest of the world catches a cold when America sneezes.
Actually, I think that we spend too much time following American markets (more of which in a moment). The burning question now – with the London equities market off some 20 per cent at the time of writing – is whether we’re stuck with recession in the foreseeable future.
At the start of this month, I wrote that a bear cub had been born in the London markets (MW March 1), but that it was unlikely to grow – in the UK at least – into a big grizzly, because we’re not exposed to the same degree of retail-market insecurity as is the US. Our financial services market has developed a closer relationship between savings and equity investment, serviced by financial supermarkets, than have the share-punting Americans.
Nevertheless, it’ll be fascinating to watch the retail market in individual savings accounts (ISAs) over the next couple of weeks. As they chant at Manchester City fans, “going down, going down, going down”. ISAs invested in cash should, of course, do rather well and UK investors anxious to put some dosh aside tax-free should be looking at equity-linked ISAs, precisely because more of the underlying investments look cheap now.
But, again, that’s how Americans think, not we Brits. John D Rockefeller said in 1929 that he knew the stock market was about to crash when he got a share-tip from his shoe-shine boy. I don’t mean that we’re about to have a meltdown of 1929 proportions, but rather that retail investors in prolonged bull markets come to believe that shares can only go up. It follows that when a market correction occurs, they retreat from the equities markets in horror, rather than seeing it as a value-investment opportunity.
We British do have financial supermarkets catering with equal emphasis for the saver as well as the investor. We can be quite smug about that. Where we have much less to be proud about is in our vacuous ignorance of European economic fundamentals.
After I pointed out our relative economic resilience here three weeks ago, Chancellor Gordon Brown delivered a prudently confident Budget and figures emerged that showed that unemployment had fallen below 1 million la
st month for the first time in a quarter of a century. Inflation and interest rates remain low, and are heading lower, and growth is stable.
And yet our leading share valuations are off by 20 per cent or more and the talk is of possible Armageddon in the markets and a protracted period of recession. Telecoms and dot-coms, still priced residually high after last year’s ludicrous bubble, are partly to blame. But so too are what Lord Lawson back in the Eighties memorably called “teenage scribblers”.
These are the commentators who engage in nothing more intellectually demanding than talking up a rising market and then panicking when it corrects itself. It’s true that equity markets value companies in terms of prospects 12 or 18 months ahead. It’s also true that those prospects in the UK and Europe are considerably rosier than they are in the US.
But our markets still collapse with dreary predictability when Wall Street takes fright. This is a real indictment of London as a financial centre for Europe. And I fear it’s because the City of London doesn’t have much of a mind of its own any more. Too many fund managers, market-makers and equities analysts in London these days consider their job to be to follow the Nikkei and Hang Seng in the morning and the Dow Jones and Nasdaq in the afternoon.
I could do that. And I don’t expect global institutions to invest billions with me. But there is a dreadful passivity in London that does itself and, consequently, Europe (literally) no credit. Why should London have become a lamb to the slaughter, rather than a bellwether?
Partly – and I hope that this doesn’t sound too grandiose – it’s to do with loss of empire. When our markets opened to foreign investment in the Big Bang of 1986, we allowed ourselves, very significantly, to be colonised by the American investment banks. The likes of Goldman Sachs and Morgan Stanley Dean Witter actively resist the notion that they are the new imperialists, but the strong received psychology is that they principally serve their “home” interests. This is our fault, not theirs.
And partly it’s to do with the recent predominance of index-trackers, rather than value investors. Any fool can make money in a rising market. So the fall in equities should be as much an opportunity as a threat. That opportunity is to return our stock market to the hands of those who can spot value and pick stocks, rather than the place-men that have dominated the London markets for the past decade.
George Pitcher is a partner of issue management consultancy Luther Pendragon