The volatility in investment markets over the past week has added considerably to investor nervousness and the big question is whether the 36-month `bull' market is finally coming to an end. Not that anyone seems prepared categorically to say one way or another, such is the markets' ability to recover. The psychological turning point, however, was probably when both New York's Dow Jones and the London FT-SE indices reached all-time highs of 8,000 and 5,000 points respectively. The long-touted "market adjustment" was "inevitable" everyone agrees; what no one is quite so sure about is whether this latest adjustment is just that and markets will remain strong or whether the cyclical downswing is now in place.
"We've been recommending a note of caution regarding the markets for the last couple of months," Dara FitzGerald of Hibernian Investment Managers told Family Money last Friday, just as the first signs of the slide in the US markets were beginning.
"The markets have been volatile and part of the problem is that maybe we tend to be too conscious of the short-term gains and falls. Even if markets fall by a drastic 10 per cent, in effect, investors are still ahead by 25 per cent this year and it is not a bad thing. But if too many people take profits, panic can set in and the market fall becomes self-fulfilling." A full-scale retreat, says Mr Fitzgerald can bring on a true bear market where consumer confidence gets badly shaken and there is only marginal growth.
In its latest market report for August, Hibernian explains how "liquidity (corporate profits mainly) is driving the markets' momentum at the present and it is difficult to determine when this liquidity could dry up or be redirected to other assets/uses. There is little room for disappointment priced into current market levels. A pause would be healthy, some retrenchment is possible, but a significant collapse of the markets is unlikely given strong current economic and interest-rate conditions."
Three independent financial advisers we consulted, Ross Barry, Owen Morton and Eddie Hobbs, are all recommending their clients take a cautious view of their investments, especially those with pension funds. "No one can predict where the markets will be in two months time," says Ross Barry, "but I recommended several months ago that clients switch pension funds out of equities and into gilts and cash, especially if they were nearing retirement." He admits he was a bit premature with the timing of his recommendation, but this week's fall has confirmed the overall sense of protecting the gains achieved over the past three years. "As for holdings in other funds, I wouldn't be too worried about with-profit funds since they are designed to smooth out market ups and downs." For Eddie Hobbs, the latest market drops should not be compared with what happened in 1987. "By the end of 1987, despite the crash, there was a net growth in the markets of 4 per cent. That wasn't a crash, it was a correction, the same way that if markets fall 10 per cent this year, that will be a correction."
"I don't think circumstances are at all the same now as they were 10 years ago. We are in a world market now. Prices cannot go up anywhere willy-nilly without losing market share, which explains why we can experience 7 per cent GDP in Ireland and not be experiencing any serious rise in inflation.
"If people are in equity funds for long terms," says Mr Hobbs," an adjustment in the markets now is of no consequence. But if you are nearing retirement or need your funds in three or four years time, say to buy property, to pay for school fees, etc., you shouldn't be too greedy and should cover the downside. But be aware that there is a price to pay." Owen Morton has also written to clients with high value pension funds lately, recommending that they "clearly get out of equities and into something safe." He added that only a small number had followed his advice up to last week, confident still that the bull market would (any may yet) keep surging ahead. "I wouldn't be so explicit for anyone not approaching retirement, but I think it is fair to say that you will never make a loss by consolidating a gain." The difficulty for many pension investors who may have wanted to switch their funds out of equities and into gilts/cash over the last few weeks, says Mr Morton, is that many fund managers offer monthly pricing of funds, as opposed to daily pricing and switches will only be done on the first of every month.
So what should someone with money to invest do right now? The concensus appears to be that there is never a time not to begin a pension fund: if the markets fall, your monthly contributions will simply buy your units of value at a lower price but with an underlying value that is still higher than a year ago. If you are thinking of buying a short-term investment, such as tracker bonds or other equity funds, you may want to sit tight for a short while to see how the markets settle (they always do).
None of our experts are keen on tracker bonds, but both Ross Barry and Owen Morton say that if you are determined to buy one, a tracker with a high degree of exposure to Japanese indices could be worth considering. Japan, they say, is long overdue a "correction" - upwards.
