One of the great mysteries of stock market investing is this: Why are shares worth so much less this week than they were last week or last month? I’ll attempt to answer the question, but it will not be the answer you hope for. It will, however, be an answer that will help private investors.
Sometimes markets do rise and fall for a good and obvious reason such as the start or ending of quantitative easing; a nation defaulting on its debt; a surge in the economy of a large nation. More often than not, though, there is no one obvious trigger. An accumulation of events and data suddenly breaks the dam wall.
There are plenty of current concerns, most notably the continued slowdown in the Eurozone, exacerbated by the fact that two major economies, France and now Germany, are slipping back. This has all been building for some time but markets have previous chosen to brush aside the many warning signs.
Then there are fears that China, the second largest economy and one that has fuelled world growth, is slowing. Again, this has been happening for some months and the slowdown is not too dramatic. China is still growing strongly, just not as strongly as before.
The price of oil has been drifting lower but again that has been happening all year and the price has not hit some critical level. In any case, the weak price has as much to do with the arrival of shale as it is about the weakening global economy and you could argue that this is good news.
You may have read this week that midcaps were ‘officially’ in a bear market because the FTSE 250 had fallen 20% from its peak or that the FTSE 100 index was on the verge of a ‘technical’ correction because it had fallen almost 10%. These figures are of academic interest only. They tell you the market has fallen heavily, but you knew that already. They don’t tell you what will happen next.
Do not waste time trying to decipher why the dam breaks at a particular moment. Investors need to accept that the market can act in an irrational way. Do not torture yourself with the conundrum of why shares are worth so much less this week. They aren’t. They are priced at a much lower level, which is not the same thing.
So the real question is whether shares were overpriced last week, underpriced this week or – and this is usually the correct answer – it’s a bit of both. In a week like this one, don’t rush in blindly but do look for bargains. It has become difficult over the past 18 months to spot clearly undervalued shares. Now is the time to look for them.
Given that the economic cycle is looking decidedly suspect, I shall be looking for defensive stocks, the ones in solid businesses, paying dividends and keeping debt down. There are still decent prospects in utilities, where, for example, Severn Trent (SVT) has a yield of 4.5% and a promise of rising dividends. I own shares in United Utilities (UU.) with a slightly higher yield and a similar promise. Pennon (PNN) is worth a look. So are National Grid (NG.) and SSE (SSE), although the dividend is not well covered and could be reduced.
Pharmaceuticals are a possibility. My shareholding in GlaxoSmithKline (GSK) has taken a hefty knock thanks to bribery scandals but the yield is the best in the sector. The two tobacco companies - I hold Imperial Tobacco (IMT) – look good despite the successes of the health lobby.
These are all indicative suggestions and statistics can change rapidly when markets are volatile. Do your own research and keep a balanced portfolio.
See You Next Week
Please look out for me at the London Investor Show next Friday at Olympia. I will be speaking briefly at the Social Impact Investing Forum, introducing AIM company presentations and urging investors not to squander their pensions in my own session.
