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2009-12-30 18:15:01
By Jamie Robertson
Business presenter, BBC World News
In the heady closing days of 1999 and early months of 2000, had you muttered
that in 10 years the FTSE would be 25% lower and that a tracker fund would
actually lose a quarter of your money over the coming decade, you would be
regarded as the kind of oddball who thought China would become an economic
superpower and the US might elect a black president.
The truth is there really was precious little evidence to support your view.
Certainly there was a fair amount of agreement that the dot.com bubble would
burst - but a loss over ten years?
That sort of thing only happened in deflationary Japan. The market had been on
a bull run from 1982, excepting a slight hiccough in 1987, and climbing
resolutely through the recession of the early 1990s.
Seventeen years of continual profits were enough to convince most players that
shares guaranteed anything from 7% to 15% annual real returns.
Well, as we now know, they didn't.
Share slump
Let's say, in a heady moment of exuberance, you had bought the internet
incubator fund Jellyworks on the strength of its 42% rise in price in the first
week of trading in December 1999. By the middle of 2000, you would have lost
most of your money.
On the S&P 500, JDS Uniphase is a pertinent reminder of the madness of crowds.
Through 1999, this fibre optic player saw its shares rise almost 2,000%, after
which it went on an merger and acquisition binge before announcing a $45bn
write-down, at that time the biggest in history. Its shares are today worth 2%
of their value 10 years ago.
While many companies leapt too fast onto the digital revolution, others were
too slow: Eastman Kodak had its historic lead in photography snatched away
because it failed to embrace new technology. Its shares are worth 7% of what
they were in 1999.
In the UK, shares in the former leviathans of the telecoms world, BT and Cable
& Wireless, were ruthlessly pummelled by the competition throughout the decade.
Their shares are worth just 15% of their 1999 value.
In contrast, the mining sector has enjoyed a golden decade. In the UK, Randgold
Resources has increased in value by 4,400%, while Cairn Energy, famous for its
unexpected oil find in India, has gained 2,400%.
They and the other resources companies have been making hay from the Chinese
economic boom that started to gather steam as western equity markets touched
bottom in 2003, and from the growing fear that the oil wells would one day run
dry.
So much for the rearranging of the cards. The problem is that the whole game
appears to have a distinctly unpromising future.
Bear rally
Standing back and looking at the post-war equity markets, and the US in
particular, we seem to be a fair way into a long term bear market - 10 years to
be exact.
In that context, the boom that went from 2003 to 2007 was a bear rally. The
pattern, if not the causes, are comparable to the 1970s, or more exactly 1966
to 1982.
During that period, in the US there was a 50% rally from 1970 to 1972 and a 66%
bull run from 1974 to 1976. But the Dow was unable to create a sustained bull
market until 1982. Then it was driven by relatively low inflation, declining
oil prices and easily available credit.
The jury is still out on the inflation question, but credit remains painfully
hard to find, while companies and individuals are working hard to repay debt
rather than take on more.
That is the major sticking point that suggests conditions are not ripe for a
re-run of 1982. The deleveraging is going to continue for a long time. We are
still stuck in a bear market.
Defensive plays
That doesn't mean we should shun the stock markets altogether. But, in these
kind of conditions, the old tenets of "buy and hold" and "invest for the long
term" seem hard to justify.
It's sadly ironic that the boom in tracker funds at the end of the 1990s came
at the most inappropriate moment possible. Instead, we should be investing for
the short to medium term, and watching our investments like a hawk.
Very few economists expect dramatic growth this coming year, and even if that
doesn't provoke a collapse of the market, it's an argument that suits
investment in the classic defensive stocks: pharmaceuticals, utilities, food
manufacturers and retailers, and household goods.
Look for a strong balance sheet and a dividend that will compensate for the
downturns; just the sort of advice your stockbroker would have been giving
around 35 years ago.