Wednesday 30 January 2008

Is it a good time to buy shares?

The FTSE 100 fell 300 points earlier this month, literally wiping billions off share prices, as investors grappled with growing evidence that the global economy is heading for recession.

The index of Britain’s leading shares has had its worst start to the year since it was set up in 1984, falling 8% to 5,802 the first time it has dropped below 6,000 since the market meltdown in August.

The FTSE 250 index of medium-sized firms is already in a bear market on some measures, having slumped 21% since its peak in May, and some of Britain’s most popular stocks are down by as much as they were during the 1990s recession.

Retailers, for example, have plunged 24% while the house-building sector is down 40%. Nearly one in five fund managers polled by investment bank Merrill Lynch for its monthly for its monthly survey believes that a global recession is either likely or indeed very likely over the next 12 months.

Those who think a global recession has already started doubled from 5% to 10%. Only 6% of professional now back equities for the best returns over next 12 months, against the 20% the previous month.

David Schwartz, the stock-market historian who this month declared that UK shares had officially entered bear market territory, said the average sell-off lasted a year and a quarter. If it began last July, when the first heavy falls occurred, that means it could be October before the outlook starts to brighten.

Meanwhile, David Rosenberg an economist at Merrill Lynch said that the market could bottom in May or June if this turns out to be an average downturn, but before then there could be further heavy price drops.

However, some respected contrarian investors think the market bottom is in sight and are selectively picking up shares.

Richard Buxton, head of UK equities at Schroders, said: “I’m buying into stocks that are collapsing over a 12 to 18 month view that’s where the real money is to be made.”

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