Calculators

Market Turmoil Continues

July 2008

For the average investor, this has proved to be a very eventful year. Following the collapse of the US sub-prime mortgage market, we have been hit by an increasingly prolonged credit crunch, the nationalisation of a UK bank, the take over of a major investment bank and now sweeping changes in the US to support two of its largest lenders. Speculation about the possible severity of the fallout continues to dominate headlines and talk of economic slowdown, coupled with soaring food and energy bills, have only compounded the pervading atmosphere of nervousness.

For companies, the credit crunch has led to a sharp increase in the cost of borrowing. Although many companies are in decent financial shape, some – particularly smaller companies – are finding tighter credit conditions hard. This could ultimately lead to job losses and higher unemployment.

On the consumer side, what was a booming housing market fuelled confidence, giving UK homeowners (in hindsight) an over-inflated sense of wealth. This, coupled with the availability of easy credit, encouraged many to borrow large sums of money. However, the collapse of the sub-prime mortgage market has severely cut access to easy credit and house prices are now falling. Consumers are more wary about their spending and many UK retailers are suffering as the environment proves difficult.

This has sent a worrying signal to those already concerned about economic growth and sentiment amongst equity investors has taken a knock, reflected by the volatility now evident in the FTSE 100 Index has proved very volatile. There are still some winners to be found but selectivity and setting realistic expectations are key.

Looking ahead, investor sentiment remains fragile and bad news continues to cause disproportionate levels of response. Investors have good reason to be wary in the short term; however, stock markets tend to be driven in the short term not by logic, but by emotional factors such as fear (and greed): the key is therefore to stay calm, think long-term, and be selective. Astute long-term investors should remain objective and remember that, in the words of Franklin D Roosevelt, “the only thing we have to fear is fear itself”.

Note: views expressed are based on information available as at 1 July 08 and are subject to change.

Shirebrook Financial Services Ltd is authorised and regulated by the Financial Services Authority. The contents of this article do not constitute advice. Before taking any decisions, we suggest you seek advice from a professional financial adviser. All figures and data contained within this document were correct at time of writing.

Market Turmoil Continues

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