I hosted a round table at Moneyweek for a group of fund managers a few weeks ago. It was about as miserable an occasion as I can ever remember. The idea was that they would spend an hour or so chatting about the stocks and markets they’d suggest people invest in now. Instead the mood was pretty much summed up by Tim Price of Union Bancaire Privee: “this is not a great environment for equities full stop,” he said.
He is right of course. The subprime debacle is far from over. Default rates on outstanding mortgages in the US have risen to 7.3% according to the Mortgage Bankers Association – that’s the highest level recorded since the 1970s (when these records began). Arrears on even prime mortgages are running at about 4% and house prices in America’s 20 major cities fell an annualized rate of 16% between August and November last year: flick through the US papers today and you’ll see endless stories of houses selling now for 40% less than they were ‘worth’ 18 months ago (just as you are in some of our regional city centres).
None of this is good news for the many and varied products derived from subprime debt this kind of debt, or indeed from any other kind of debt and it isn’t good for corporate earnings either: note that between 2003-6 a good 2% of annual GDP growth in the US was a result of spending based on mortgage equity withdrawal. Other data out of America are horrible too (activity in the service sector is contracting and employment dropped for the first time in four years in January).
Things don’t look that hot in Europe or the UK either; here the housing market is slipping away from the optimists as the commercial property market did long ago; the supply of credit is drying up; the retail environment is so rubbish that even Marks & Spencer has been reduced to sending out Gap style discount vouchers to all and sundry; and the Bank of England and Chancellor appear to be helpless in the face of slowing growth and inflation.
Be wary of equities over the coming months
The problem for stock markets is that while none of this is a secret and while shares have fallen a lot in most places they still haven’t fallen nearly enough to reflect this miserable reality. Any cheapness you see in the market is predicated on earnings coming in as forecast. But how can they? Consensus forecasts suggest earnings rising by 17% in the US in 2008 and around 10% in Europe. Yet in recessions earnings fall – and usually markets fall enough to reflect that.
Indeed when the US goes into recession European and UK equities fall by over 30% according to analysts at Goldman Sachs. So far the FTSE 100 is down 13% on last year’s July high, and the Dow Jones Euro Stoxx 50 is down 17.5%. So there’s a way to go – which makes sense. After all, it took the banks, the Federal Reserve and Gordon Brown a good few years to get us in to all this trouble: no reason why it should all be over in a matter of months.
That’s something to bear in mind as the Isa season kicks off: for the next six weeks the financial services industry will be devoting itself to persuading you to invest your full allowance – £7,000 – in the equity market. But if you do so do it carefully: there’s not that much point in investing via a vehicle which protects you from capital gains if all you have is capital losses is there?
First published in The Evening Standard 19/2/08
Our roundtable experts may have been downbeat on most shares – but they did identify some places where there’s still value to be found. To read their tips, plus their views on the outlook for the economy, see: Stocks to ride out the storm. And if you’re not already a subscriber, you can read this article now by signing up to a free three-week trial of MoneyWeek