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Known unknowns

Last week’s market volatility reminded us we have all been here before but the world is now a very different place

Last week was a rollercoaster ride for investors and 100-point swings were the order of the day. It was not quite as uncomfortable as the previous week, when we plumbed new lows for the current year, but the more nervous investors were probably running for the hills. Even seasoned campaigners like me had to confess that the final outcome was still obscure.

Confess in public, too. I was speaking at a seminar where my task was to make some sense of recent market turmoil – not the easiest of requests I have received recently. If there is one advantage I possess, however, it is that I have sat through similar unsettling periods several times before.

No two financial crises are exactly the same but given that history tells us we do eventually emerge at the other side, one cannot help wondering why markets react as they do. The answer, of course, is that the fear and greed that lie behind share-price movements are emotional drivers. Markets always overreact – in both directions. Long-term investors, such as Warren Buffett, are prepared to ride out these swings, others are less willing to do so.

The first serious crisis I experienced was the 1973-74 bear market. By the time it got properly under way, I had worked in the investment sector for 10 years so was not quite wet behind the ears. In a way, that was a bad thing. With less experience, I might have been less worried.

It was a truly dramatic time. The combination of the Yom Kippur war in the Middle East, the quadrupling of the price of oil, the three-day week, a secondary banking crisis, not to mention two general elections in the space of six months, was sufficient to drive down shares by 70 per cent in the space of two years.

The fact that the market more than doubled in the first few months of 1975 only goes to show the extent of the overreaction.

Emotionally, investors saw Armageddon lurking just below the horizon. Could capitalism survive? Would Britain go bankrupt? As it happened, we were bailed out by the International Monetary Fund a few years later, paving the way for the election of Margaret Thatcher and all the changes that resulted. The rest, as they say, is history. Much the same concerns are being expressed today but the environment is very different. The term emerging market had not yet been coined, to the best of my recollection in the 1970s, the global village in which we all do business was not even a gleam in an entrepreneur’s eye and shifting money abroad was a complex and expensive operation.

You only have to look at the flood of money leaving Greece to realise that, for some, the trials and tribulations of the mother country need only be an irritant.

Apparently, enquiries from wealthy French for property in London increased by 70 per cent in the immediate aftermath of the election of a socialist president. Life is very different today.

It does not follow that markets will not react in a similar manner to previous periods of financial instability but there are elements of the current situation that are unsettling.

The period immediately after the banking crash and inflation surge of the mid-1970s saw the Government step back and market forces come to the fore. Regulation assumed a lighter touch. Quite the reverse seems likely as a consequence of recent events.

And governments seem set to be more intrusive. We may now be well into a crisis that started more than five years ago but life afterwards could be very different.

Brian Tora is an associate with investment managers JM Finn & Co


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