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Investment view

Well, I did put my money where my mouth was. Last week, I dipped a toe back into the market. The trigger was the FTSE100 flirting with the low that was plumbed back in March. Judged purely on short-term considerations, the timing could have been better.

The stockmarket is at the same level as it was at the beginning of 1998.

That year saw the FTSE100 soar above 6,000, only to be pulled back by the triple whammy of the Russian debt crisis, the implosion of Far Eastern economies and the collapse of Long Term Capital Management. It drove the index down to around 4,700 during the autumn of 1998 and prompted Alan Greenspan to embark on a series of interest rate cuts that, given the action of the Federal Reserve Bank this year, engenders a feeling of deja vu in the market today. However, then investors took heart and we saw a rapid, year-long recovery which sent our own headline index to within a whisker of 7,000. How different conditions are today.

The problem stems in part from the fact that different sectors of the market have been performing in widely differing ways. In the UK, the FTSE100 peaked at the end of 1999, not far short of 7,000. Last week, it was trading below 5,300, a fall of a close to a quarter. Yet throughout that period some sectors have performed significantly worse and others barely registered a fall at all – until recently, that is. The principal distortions come from the technology sector. This part of the market had not yet peaked at the end of 1999. The Techmark index started the year at little more than 3,500, peaking at over 5,700 at the beginning of March, a rise of more than 60 per cent in less than three months. The pullback since then has been massive, with this partcular Index having lost almost three-quarters of its value from the height of the TMT surge.

Unfortunately, it was in March 2000 – just at the top of the technology boom – that the FTSE100 saw 10 new economy stocks replace old economy stalwarts in the FTSE100 Index. This was not just a reflection of the good performance of the technology sector. Traditional companies, in so-called legacy industries, suffered as money flowed into new economy business during the early months of 2000. So it should be no surprise that, overall, these parts of the market have held up remarkably well over the past 15 months. Until recently, that is.

The bear market in technology and telecom stocks presaged a severe downturn in the fortunes of these particular industries. Bad news presently abounds and it is far from clear that things have stopped getting worse.

More recently, we have seen selling of other sectors in anticipation of difficult times ahead. There are plenty of signs out there on which to build your wall of worry. Manufacturing industry is in a parlous state, business confidence has been falling and there are now signs that the consumer is cutting back. The index seems to be telling us that recession, or at least close to it, lies just around the corner. But the real figures coming out from the Government belie this pessimistic picture.

Of course, we could yet see a sharp economic downturn in this country.

Fortunately for investors, markets tend to anticipate events, not reflect them. In the recession of 1974/75, it was the apparent collapse of Burmah Oil that triggered the turn in the market – a turn upwards. Economic conditions were still poor in 1975 but in the first three months of that year the market doubled, admittedly from a very low base. The worries today are that we are a long way from reaching the bottom but there does seem to be enough bad news coming out to suggest that we cannot be that far away from the nadir of this market. Perhaps we need that final disaster to act as a catalyst to dispel the gloom that exists.


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