Freeze calls to mind past financial shivers
By Alan Steel
Saturday 4 December 2010
Last weekend, despite the snow and ice, we had a brunch party with my daughter and family at my house to celebrate her birthday. Road conditions did their best to spoil things but I'm glad to say they failed.
I asked Catherine if she could recall the last time it snowed as badly as this, closing some roads on her birthday. She couldn't, because it last occurred the day she was born, 36 years ago.
There were other reasons why that year stood out for me.
It was a horrific year for world stock markets, especially in the UK. The oil crisis of October 1973 started one of the most vicious bear markets and stock market collapses in history.
To make matters worse, in August 1974 Richard Nixon became the only US president in history to be forced to resign his post. In the midst of a recession, that did little for investor confidence. The UK index at the time, the FT 30 Index - replaced in 1984 by the FTSE - fell 73 per cent between October 1973 and December 1974.
You can imagine the headlines, which were the reverse of those in Time magazine in 1973, three days before the stock market crash, which heralded the year as "a gilt-edged year for equities". Wrong again. Commentators talked of the death of equities and even predicted the UK would slide into communism.
But amazingly, in January 1975, world stock markets, especially the UK, recovered strongly and made fortunes for those brave enough to have bought them at bargain basement prices.
Yes there was a UK debt crisis all these years ago. And I would suggest it was more serious than the difficulties we all face today. I'm not suggesting that the problems facing Ireland and others are not serious, but we have been here many times before. Does anybody remember Dubai only a year ago?
Look at the debt crises overcome in the last 20 years. There was Mexico in 1994, the so-called Asian contagion in the late nineties, the default of Argentina, and the collapse of the Russian rouble. This brought down Long Term Capital Management, a "can't go wrong" billion-plus US dollar hedge fund.
Check out what happened to world stock markets in the year immediately following each of these crises. The Dow Jones index was up an average of 17 per cent just 12 months later. US economic experts Ned Davis Research have found the average gain in the index after 28 such debt crises since 1940 is 12.5 per cent over the following year.
Recently I had dinner with Sebastian Lyon, of Troy Trojan Fund, a no-tricks, no-gimmicks cautious fund with a superb record since its launch over nine years ago. He tells me he's never seen such value in international blue chip equities.
The brilliant Neil Woodford at Invesco Perpetual has said the same. He has just published analysis showing that the yield on quality equities, such as Glaxo, has only been ever been so high compared with the yield on corporate bonds once before - at the end of 1974.
Similarly, a colleague has just returned from Dubai. When he was there he met a man who helps run the Abu Dhabi Sovereign Wealth Fund, which receives $680 million a day for investment. Currently over 55 per cent of the fund is invested in global equities because they look such great value.
So history tells to be less afraid. Indeed it suggests at this point of economic crisis that growth equities are the place to be. Or as somebody put it to me, why not follow the Fred Flintstone equity investment system and invest in equities like Abu Dhabi Do.
Article courtesy of The Scotsman
Saturday 4 December 2010