I have long been a fan of Edward Bonham Carter Chief Executive of Jupiter Asset Management. He has spoken wisely through difficult times in the past. Here therefore are his most recent comments on the current market volatility for all investors to consider.“Growing fears that the global economy is heading toward recession have resulted in heightened levels of stock market volatility in recent weeks. While stock markets have been enduring increased volatility since the emergence of the sub prime crisis in the summer of 2007, markets had staged something of a recovery between March and May this year as investors believed that the losses caused by the crisis were being fully quantified by financial institutions.
However, since mid May, investors have become increasingly nervous and in the past week a number of stock markets, including the Dow Jones and the FTSE 100, have formally entered bear market territory (defined as a drop of 20% from the most recent peak). At the time of writing, the FTSE 100 index is back to February 2005 levels, while the Dow Jones is down to around August 2006 levels at 11,230.
Key to these heightened concerns has been worsening economic and corporate data, including continued write-downs by banks in relation to subprime loans and a deteriorating outlook for house prices. The UK has borne the brunt of some particularly negative corporate data over the past week, with Taylor Wimpey failing to raise additional funds from investors and, together with rival builders Persimmon and Barrett Developments, announcing significant job cuts. In addition, the British Chambers of Commerce warned on Tuesday that the UK is facing a serious risk of recession in the next three months.
Inflationary pressures are also a major global issue, with investors grappling with uncertainty over the extent to which central banks can keep interest rates low in the face of rising food and oil prices. Emerging markets have been particularly badly affected. Inflation has reached 30% in Vietnam, 11.6% in India, 11% in Indonesia and the Philippines, 9% in Thailand and 7.7% in China. It is worth noting that the longer oil prices remain high, the greater the likelihood that manufacturing will become more localised. Shipping costs, for example, have almost trebled. In 2000, when oil was $20 a barrel, it cost $3,000 to ship goods from China to the West. At current oil prices, that has risen to more than $8,000. If the oil price hits $200 a barrel, shipping will cost $15,000. At that level, it could dent Asian manufacturing economies that have profited from globalisation.
We are still of the view that consumers are suffering a squeeze on their real disposable incomes. This is unlikely to be alleviated in the short term. The implications for markets as a result are that the number and severity of profit warnings will increase and stock market volatility will remain high until there is greater certainty on the outlook for growth, inflation and interest rates.
While one should expect corporate earnings in general to deteriorate, the balance sheets of many companies remain, on the whole, in sound condition. High quality businesses with strong management teams and pricing power will retain the ability to grow and gain market share from their rivals despite the poor economic environment. It is these businesses that our fund managers are focused on identifying. Such difficult periods can prove nerve-wracking for investors. However, it is worth noting that in an inflationary environment, equities remain a better place to seek capital protection than bonds. So, I believe investors should hold their nerve and view these sharp downturns in share prices as a long term buying opportunity - with the proviso that selecting the right investments remains key to achieving strong returns over the long term."
However, since mid May, investors have become increasingly nervous and in the past week a number of stock markets, including the Dow Jones and the FTSE 100, have formally entered bear market territory (defined as a drop of 20% from the most recent peak). At the time of writing, the FTSE 100 index is back to February 2005 levels, while the Dow Jones is down to around August 2006 levels at 11,230.
Key to these heightened concerns has been worsening economic and corporate data, including continued write-downs by banks in relation to subprime loans and a deteriorating outlook for house prices. The UK has borne the brunt of some particularly negative corporate data over the past week, with Taylor Wimpey failing to raise additional funds from investors and, together with rival builders Persimmon and Barrett Developments, announcing significant job cuts. In addition, the British Chambers of Commerce warned on Tuesday that the UK is facing a serious risk of recession in the next three months.
Inflationary pressures are also a major global issue, with investors grappling with uncertainty over the extent to which central banks can keep interest rates low in the face of rising food and oil prices. Emerging markets have been particularly badly affected. Inflation has reached 30% in Vietnam, 11.6% in India, 11% in Indonesia and the Philippines, 9% in Thailand and 7.7% in China. It is worth noting that the longer oil prices remain high, the greater the likelihood that manufacturing will become more localised. Shipping costs, for example, have almost trebled. In 2000, when oil was $20 a barrel, it cost $3,000 to ship goods from China to the West. At current oil prices, that has risen to more than $8,000. If the oil price hits $200 a barrel, shipping will cost $15,000. At that level, it could dent Asian manufacturing economies that have profited from globalisation.
We are still of the view that consumers are suffering a squeeze on their real disposable incomes. This is unlikely to be alleviated in the short term. The implications for markets as a result are that the number and severity of profit warnings will increase and stock market volatility will remain high until there is greater certainty on the outlook for growth, inflation and interest rates.
While one should expect corporate earnings in general to deteriorate, the balance sheets of many companies remain, on the whole, in sound condition. High quality businesses with strong management teams and pricing power will retain the ability to grow and gain market share from their rivals despite the poor economic environment. It is these businesses that our fund managers are focused on identifying. Such difficult periods can prove nerve-wracking for investors. However, it is worth noting that in an inflationary environment, equities remain a better place to seek capital protection than bonds. So, I believe investors should hold their nerve and view these sharp downturns in share prices as a long term buying opportunity - with the proviso that selecting the right investments remains key to achieving strong returns over the long term."
Nothing new or particularly startling I fear but it is straight from the horses mouth.
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