Simon's Market View

I think you would have needed to live life as a hermit not to have realised that the past year has been an incredibly difficult one for the economy and investments generally.

This time last year, we knew that the banks had problems, but no-one really believed that any of the significant institutions would be allowed to fail. Therefore many believed that the stock market valuation of various financial institutions had fallen as far as it was likely to.

There have been several theories as to why the US Treasury (the Fed) let Lehman Brothers fail in September 2008. Many said that it was President Bush’s last attempt to show he was a strong leader. Whatever the reason, it had a catastrophic effect on the economies of the world. Suddenly everyone, including the other banks, realised that a bank could fail. Banks were afraid to lend to each other in case the banks it lent to went bust and credit dried up, or at least became very expensive. Investors didn’t know whether their bank would survive.

As was likely to happen when things like this happen, panic set in. Markets around the world were sold off, the value of fixed interest securities fell because of fear that companies that couldn’t obtain credit would default on their debts, and residential and commercial property continued to fall. Over the year, of the mainstream investments, only gold and Gilts ended up in positive territory.

So, where does this leave us? The index of the UK’s largest companies, the FTSE100, has risen some 24% since its low point on 3rd March this year. Plus the yields on Bonds have fallen, meaning that values have increased) over that same period. In more usual times, bonds and shares would be expected to behave differently. Hence the reason we recommend that people diversify their investments.

I think we will see some profit taking in the stock market, so the index could take a dip in value. However, there is no doubt that the markets are generally feeling better about themselves than just a few months ago.

We have seen some major investors moving back into commercial property as they see income yields as a particularly good return at present. I think that commercial property will take a good while to return to previous values, but we are starting to reconsider it within our portfolios, as it now looks reasonably good value.

After the arguably positive blip in Spring and early Summer, residential property is not looking so attractive. Just based on the basic rule of economics “supply and demand” it should be moving up in value. Agents will talk up the market, but they have few properties on their books, so supply is weak. However, purchasers just cannot raise the necessary funds and until banks start releasing funds in a more reasonable manner, the housing market will remain in the doldrums. So demand, which should be outstripping supply, is just not happening. Rightmove saw the asking price of houses fall by 2.2% this month.

Interest rates, currently at 0.5% seem set to remain that way for the time being. I would not expect them to start rising until about summer next year, and then only slowly. So, again, the message is, if you need income or a reasonable return, you will need to take some risk to get it.

An interesting positive point is that there are many investors out there, who need to look at their investments and savings to see if they really suit their current circumstances. With values historically low, it is a marvellous opportunity to restructure these investments. Often the tax consequences are minimal or you could even create tax losses that can be carried forward and set against future gains.

For more information please contact Simon Ludden, Financial Planning Manager at Furley Page Solicitors.