If you thought that the time was right to dip your toe back into the stock market, perhaps you should think again.
A disastrous start to share trading in the new year has seen London’s blue-chip index hit by some of its biggest falls, amid warnings of looming recessions, both here and across the Atlantic, and speculation that things are about to get worse.
A near 150-point drop in the FTSE 100 yesterday was prompted by fears of another crunch in the financial sector, with private investor stalwarts such as Barclays, HBOS and Royal Bank of Scotland all taking a battering. Had it not been for a late rally prompted by comments made in the US by MBIA, the monoline insurer, the FTSE would have recorded its worst January on record.
As it was, according to David Schwartz, a stock market historian, the London market put in its third-worst performance last month, tumbling 9 per cent over the period.
The FTSE has suffered heavier drops only in 2000, when it fell 9.55 per cent, and in 2003, when it lost 9.47 per cent. “I don’t recall ever seeing anything like this; the last two falls of this size were in bear markets,” Mr Schwartz said. “Investors have no belief where the market is going; they are riding the market like an elevator, up and down.”
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Fund managers were equally bleak in their assessment. Alain Grisay, the chief executive of F&C Asset Management, said: “There’s no doubt that the environment out there is brutal. These are very testing times.”
Mark Lyttleton, a fund manager at BlackRock, which is part-owned by Merrill Lynch, said: “There are a huge number of uncertainties in the global economic outlook and the market doesn’t like uncertainty.
“We know what the US is doing, aggressively cutting rates, but we’ve not really had that here. We’re going to have to endure a slowdown in economic activity.”
The Bank of England has already cut interest rates once to try to head off the recession threat, although in January it kept the cost of borrowing on hold.
Ian Scott, a global and European equity strategist for Lehman Brothers, said that market valuations had seesawed wildly in recent weeks. “There’s a lot of volatility, with a risk of recession in the US and an obvious slowdown here,” he said.
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It may also be a time for specialist, or “star” stock pickers to come into their own. “When you have a violent environment around you, and volatility is very high, there are opportunities to show what value fund managers can bring,” Mr Grisay said.
In the UK, all eyes will turn to the busy year-end reporting season for the banking sector this month for signs of fresh credit-crunch writedowns or increased provisions for bad and doubtful debts.
Mr Scott said: “Clearly, it’s a major focus for the market. There’s a degree of scepticism towards the UK banks. The feeling is that ultimately they’ll come out with some writedowns.”
Mr Scott said that there had been a rapid deterioration in sentiment and that investors had been taking “a very aggressive view towards the future direction of the economy”.