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Taking stock

Matt Davis finds that equity markets have ridden out the terrorism

After the 7/7 terrorist attacks in London, what has been the impact of nearly four years of global terrorism on the investment market?

A record number of 4.75 billion shares were traded on the London Stock Exchange last week after it declared a fast market following the attacks. This meant that traders did not have to stick to the prices on their screens. The FTSE began on the day of the bombings at 5,230, fell by 200 points in the aftermath of the attacks and rising to close at 5,158. It has since risen above pre-bombing levels.

Fund managers were divided on the day of the attacks on whether to trade. Credit Suisse multi-manager Robert Burdett says: “Some fund managers actively traded on the day while others seemed to feel a moral obligation not to, but the market has rallied strongly following an early shock.”

Burdett points out that experience shows it is right for fund managers to buy into market reactions of the kind that struck when the bombers hit. He says travel companies were sold down and then rallied, similar to the reaction to the aftermath of the 9/11 attacks.

Defence contractors have been rising since 7/7 but Burdett agrees with Harbottle that this has been a long-term theme as the industry has been consolidating.

Liontrust marketing director Jonathan Harbottle believes that the long-term impact of terror has been on transport. He says defence stocks such as GKN and IBA systems have benefited as well as generally defensive stocks such as tobacco, utilities and some financials.

Harbottle says: “A case in point is British Airways, which has suffered along with a number of the big transport businesses in the aftermath of September 11. But I think that IFAs buying general UK growth funds should not be too concerned about this and leave the selling to their fund manager. They should only be concerned if they have bought a fund with a specific bias.”

Chartwell investment manager Ryan Hughes says the firm’s clients have become more risk-averse since the terror attacks of 2001. He says such things have a lasting effect on clients from a risk-aversion point of view but that a well diversified and balanced portfolio can help to protect people from shocks.

Hughes says: “The demographics have changed since September 11. Fewer younger people are taking advice as they have a sense of living today and wanting to enjoy life. They do not feel the need for financial advice despite the fact that they need it more than ever. But big shocks like this just about put the nail in the coffin where younger buyers are concerned.”

Need An Adviser director Jo Roberts says terrorist attacks bring into perspective how important it is for clients to understand the level of risk in their investment.

Roberts says: “A lot of older investors have individual shares, for example, in banks or utilities, that they check on Teletext. After September 11, the value of some of these shares halved and it prompted people to seek advice about getting lower risk investments. If terrorism prompts people to review the risk levels of their finances it could have positive market effects.”

Origen investment manager Adam Carruthers says the Bank of England’s decision not to cut interest rates in the immediate aftermath of the London bombings draws out the difference between the economic impact of the London attacks and the 9/11 attacks when a global consensus led to the dropping of interest rates across borders.

Carruthers says: “The impact of the London bombings on the consumer and the UK economy generally is likely to lead to a rate cut in August although this has been anticipated anyway. Sterling has continued its sharp drop over recent weeks and this has accelerated following the attacks but this is probably good for the long-term health of the economy as it has been valued too highly for some time.”

As far as the UK retail economy is concerned Burdett says: “The UK economy seems to be slowing down but we are already detecting two-way views on UK retailers. Some people actually took the opportunity to buy retail stocks immediately after the London attacks.”

Since September 11, global markets appear to be better prepared to react to terrorism. Norwich Union investment strategist Gerard Lane says Madrid and London have shown that terrorist impacts on global markets are now taken on board more quickly than they were in 2001.

Harbottle says the Madrid attacks led to stocks no longer being rewarded in valuation terms, even for delivering positive surprises in their results. He suggests that the market took fright in this area but says those tempted by a kneejerk reaction in London would have looked foolish when the market rallied within 24 hours. He feels the impact of London winning the Olympic bid will probably have a stronger impact on the UK equity market, especially where smaller companies are concerned.

Lane says: “Without wishing to sound callous, there will be different sectors affected but overall we would suggest that the broad economic and investment climate, especially for UK equities, continues to look positive.”

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