Business | Markets
Investors are heading into a blanket of fog
They are supposed to be planning their strategies for the rest of this year and setting the stage for 2009. But after one of the most volatile quarters in a decade, the road ahead is decidedly obscure.
- Reuters
- Published: 00:07 October 2, 2008
- Image Credit: Bloomberg News
- An investor monitors stock prices at a securities trading firm in Seoul, South Korea. Asian stocks plunged the most in eight months, the dollar fell and treasuries rose.
London: Investors are driving into a fog without headlights.
They are supposed to be planning their strategies for the rest of this year and setting the stage for 2009. But after one of the most volatile quarters in a decade, the road ahead is decidedly obscure.
Few, if any, of the stresses that have battered investors over the past months have gone away.
"All you can say with certainty is that there is more uncertainty," said Michael Dicks, head of research and investment strategy at Barclays Wealth.
The implication is that investors are likely to stay super-cautious over the short-term and that a search for clarity will be the most important market mover for some time to come. It is a recipe for continued volatility.
The third quarter was brutal for many, particularly in September, a month that saw US financial stalwarts Lehman Brothers, Merrill Lynch and AIG respectively go under, get taken over and be bailed out.
Contagion spread too, with financial institutions in Britain, Belgium, Germany and Iceland needing various degrees of help from government or industry competitors.
US stocks, meanwhile, went into a one-day free-fall when the US Congress failed to agree a $700 billion support plan.
As a result equity investors have watched wealth drain away. MSCI's main world stock index lost 17 per cent in the quarter and is on track for its worst year since it was created in its current form at the end of 1987.
Once high-flying emerging market stocks are in the same boat, with MSCI's sector benchmark down more than 27 per cent for the quarter, the worst in its history of over 20 years.
Little comfort
There has been little to take up the slack. Emerging market bond spreads widened by 119 basis points while commodities turned as the world economy stumbled. Copper lost 25 per cent and oil 28 per cent.
Government bonds did give some returns, with 10-year euro zone yield falling a solid 61 basis points as prices rose on demand, but such debt is widely seen as expensive.
It is perhaps not surprising, therefore, that the one of the biggest winners in the quarter was the VIX index, the so-called fear index that acts as a proxy for stock market volatility. It gained more than 64 per cent.
So what do investors do now? Not much, it would seem.
Reuters asset allocation polls released on Tuesday and capturing the mood of leading investment houses following the collapse of Lehman mid-month, showed an almost palpable retreat from risk.
They were heading into the fourth quarter with stock exposure at its lowest level in the nearly 4-1/2 years the global data has been compiled, with weightings well below long-term average levels.
Bond holdings, meanwhile, were roughly at average levels - hardly a major endorsement given the climate - and cash was king.
The latest data from fund tracker EPFR Global showed a similar flight to relative safety - relative, because for many nothing looks particularly safe these days.
The group tracked large outflows from global bond and equity funds in the latest week and inflows into US equity funds and money market funds, moves that would suggest US investors are repatriating their money to the less risky home shores.
Extreme caution, essentially, is the watchword.
"We are in capital preservation mode still," said Tony Dolphin, economics and strategy director at Henderson Global Investors.
Dicks, of Barclays Wealth, went further. "Most investors are clearly saying let's put less weight in 2009 because we might not get there," he said, only part in jest.
While investors have thrown in the towel over the short-term, however, it is not a total capitulation. There is hope that 2009 will be better for investors even if the inflection point remains elusive.
Michala Marcussen, director of strategy and economic research at Societe Generale Asset Management, reckons there are two scenarios facing investors - everything blows up and a full-fledged global depression takes hold or governments and central banks step in and stop the financial crisis.
She is betting on the latter and reckons equities could recover sometime over the next year to gain as much as 15 per cent.
But that would be a recovery from an extraordinary situation and would not remove all the hazards on the road.
"What's clear is that even once the fog lifts, the economic landscape we are going to find is one of weak economic growth," she said. "There is no quick fix."
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