So the 5,000 level on the FTSE 100 Index turned out not to be a barrier after all. The relentless sideways movement of the market was finally broken on the downside. Whether this is a brief excursion into the murky territory reached in the aftermath of last September's terrorist attacks, it is difficult to say but the significance of breaching this lower limit is leading chartists to warn of worse to come.
As is so often the case, London is simply following the lead of our transatlantic cousins. The US market is under pressure, with eight-month lows being tested. Confidence in equities remains at a low ebb. Corporate greed continues to deliver damaging messages while people still feel more inclined to put their trust in bricks and mortar – over here as well as over there. If the Noughties are to be awarded the accolade of an epithet, then the financial community would probably opt for “worrying” – so far.
At times of significant change, it can be difficult to grasp precisely what the consequences are for the future. The realisation is dawning slowly that the returns we have seen in equity markets during the past generation or so may not be repeatable. This is not to say there will not be any money to be made but rather that valuation expansion is at an end and corporate profits need to catch up if justification for current market levels is to be achieved. This is worrying, given the poor performance of many sectors. Aside from deterring would-be investors, this loss of faith in equities is having all manner of consequences elsewhere.
If ordinary shares are likely to be slow to return to a period of delivering superior growth to bonds, then the recognition that tighter regulation of the occupational pension market could undermine many final-salary schemes will accelerate the rush for cover we are already seeing. It is true that defined-contribution schemes could well adopt an equity-first approach to investing but it seems inevitable that any remaining final-salary schemes will be managed in an altogether more conservative manner. In other words, the main buyer of equities since the 1950s could be switching allegiance to bonds. Markets these days are in professional hands and much more efficient. You can no longer rely upon market inefficiencies – or inflation for that matter – to bail you out. And it seems the pension fund managers may not be there either.
If this is sobering news for the average investor, it should not be put off those seeking to be a little more adventurous that simply leaving their money on deposit. We can expect increasingly sophisticated products that will allow investors to manage risk in a more defined manner.
The level of choice seems set to expand but with that will come a need for higher-quality advice. It will be interesting to see what, if anything, the Sandler report has to say on whether the advice that the average investor receives is as good as it should be. I do not expect the financial community to be let off lightly.
However, none of this is taking place at a good time for the Government. The savings gap is wide and can only grow wider if markets do not re-establish an upward path. Not only will existing savings be eroded, but there will be little encouragement for new people to put their money aside for a rainy day. Yet that is precisely what Governments must persuade people to do. The burden cannot rest with the state. It is interesting to reflect that the interests of the Government and of the market coincide.
I confess to being disappointed that markets have not established better equilibrium sooner but doubtless we will be looking back at this difficult time at some stage and recognise the excellent opportunities that existed.