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History holds few clues for analysts

Picking up the pieces after the events in the US has been a near impossible task. With Wall Street closed for four trading days – the longest time since World War One – fund managers and IFAs were left unable to trade many open-ended funds. Several UK providers imposed blanket trading suspensions across their entire fund ranges.

But even with Wall Street reopened, the economic effects of the attack on the World Trade Centre will not start to unfold fully for several weeks. With no comparable incident in recent history, the predictions of even the top global analysts have to be taken with a pinch of salt.

BestInvest deputy managing director Jason Hollands says even the wars of the past 20 years are not suitable comparisons for the events of last week. He says: “There are few hard and fast lessons from history. The Yom Kippur war of 1973 was followed by a savage market downturn although this did occur at a time when markets were near their peak.

“In contrast, the 1990 Gulf war turned out to be a great buying opportunity, with global equity markets falling by 20 per cent in two months but then recovering half of that within one month.

“The different responses of the market between 1973 and 1990 probably had more to do with the underlying economic climates. When Iraq invaded Kuwait, the US economy had already started deteriorating. In both 1973 and 1990, oil prices rose dramatically, as did gold. The events last week take place at a time when the US economy is already deeper into a slowdown than it was in 1990. One can only speculate but this may provide some element of downside protection.”

While not all are convinced by Hollands&#39 optimism, most agree that the longer-term economic outlook depends greatly on the reaction of the US government to the crisis. All indications so far have been that the US considers last week&#39s attacks to be a declaration of war. But with no single country likely to emerge responsible for the attacks, it now seems increasingly unlikely that a full-scale conflict will break out.

Confederation of British Industry director-general Digby Jones concedes that markets could still go either way but believes it is too early to make an informed call. He says: “Clearly, there will be short-term disruption to financial markets and to commerce within the US, with normal business hampered by travel restrictions. It is also true that business and consumer confidence were already fragile. If these were to worsen, then the downside risks would increase.

“Where this leads will depend on how soon financial and commodity markets return to normal, as well as the reaction of policymakers. But it is premature to say that the attacks in themselves will necessarily lead to a significant further weakening of the world economy.”

Product providers have been far less guarded in their predictions, with many now forecasting recession. Old Mutual and JP Morgan Fleming were both predicting further misery in the equity markets.

JPMF chief investment officer Martin Porter believes that, even without a war, the effects of the attacks will be economically disastrous. He says: “Much will depend on the nature of the response from the US. But, assuming it is not disproportionate, the terrorist attack on the US is likely to be recorded in economic history as the trigger that sent an already weak economy into recession.”

From the IFA perspective, the consensus of advice is to wait and see. Bates Investment head of research James Dalby believes European market movements at the end of last week were only anecdotal as long as Wall Street remained closed. Although he concedes that the signs are ominous, he believes IFAs would be foolish to panic-sell.

He says: “It is all knee-jerk reactions at this stage and it is going to take a little time before we see some rational responses. It is not such a bad thing that you cannot deal in a lot of funds. It stops the knee-jerk reactions and gives some time for some news to unfold and for some considered opinions to be formed.”

With several pundits having called the bottom of the US equity market during the month before the attacks, the message not to panic may be shrewd advice.

While consumer confidence will most certainly be hit in the US, many of the reasons for a rally still hold true, with markets now at even lower levels.

Dalby believes the most important question for IFAs to ask themselves is whether they think equities will outperform cash in the longer term. He says the events of the past week have not shattered his confidence that equities will outperform, but concedes that investors may be in for a rocky ride in the short term.


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