Global stock market falls

Over the last couple of days world equity markets have fallen back sharply. “What is the cause and should we be concerned?” asks John Kelly, Abbey’s Head of Client Investment.

“The trigger for these events is as ever more complex than the simple event of weakness in the Chinese market,” says Kelly. “More important has been a series of indicators from the US which have been indicative of a slowdown in economic growth. These include a reduced pace of profits expansion (but still at 10% p.a. during the fourth quarter of 2006), a fall in the growth rate of capital investment and signs of problems at the ‘sub-prime’ end of the mortgage industry. Together these are being read as a sign of a maturing economic environment and this has caused a number of short-term investors to take profits. Because of the way international markets operate, this rush for the door can generate a disproportionate market impact as each competes to be the first to trade.

“Our view on the US economy has not changed as a result of this economic news, nor has our expectation for the US market. We expect the US economy to continue to grow, but at a slower pace. Company profits will go up, but not at a 10% plus pace. As US growth slows, we expect other economies to take up some of the slack and help push the global economy along. Europe is doing better, Japan is picking up momentum and growth is very strong in China and India – remember China is now the fourth largest economy in the world, only the US, Japan and Germany are larger.

“This growth and the rising profits it will generate will support stock markets. Despite the strength we have seen over the past few years, these are not overvalued. Good value however is not proof against profit-taking or bouts of weak sentiment such as we are experiencing now. Over the medium term, pull backs such as this are healthy. They shake out the weak holders and bring share prices down to levels where there are bargains to be had. Often, they are very short lived, lasting weeks not months, but this period can test the nerves of investors made anxious by the shallow, headline-based coverage in much of the press and television news. Our investment strategies are very carefully put together to work over time. Investors should not panic away from them because of some unsettling short-term developments.”