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Is it a desperate situation?

Byline: By Brian Tora

Any hopes that the shake-out in markets would be short-lived were dashed this week when trading was suspended on the Indian stock market and our own FTSE 250 index suffered its biggest ever one-day points fall.

Commodity stocks were behind the pull-back in share prices and to say that confidence is fragile hardly expresses the change in investor sentiment that has taken place. Comparisons are being made with 1987, when markets lost a third of their value in two short weeks. Is the situation really that desperate?

How well I remember the events of that autumn nearly 19 years ago. A hurricane had swept through south-east England during Thursday night and the City awoke on Friday morning to discover routes into work blocked by fallen trees, telegraph poles and electricity cables. Such was the disruption to travel and electricity supplies that trading in London was suspended for the day.

Back then, large falls in US shares on Thursday and Friday were condensed into a positive bloodbath on the London Stock Exchange when the market reopened on Monday. I was busy wielding a chainsaw on the numerous trees littering my garden that morning when a frantic call from the office had me scurrying to town on a rail network still recovering from the winds of the previous week. Not that there was much to do when I arrived. The action, so to speak, was over very swiftly. Selling anything was tricky ( and in any event it felt too late.

Indeed, too late it was, in the context of how markets performed subsequently. But rebuilding investor confidence was a long, drawn-out affair. Certainly, trading levels were subdued for a little while.

Eventually investors regained their collective nerve and the 1990s turned out to be a golden period for stock-market performance. With the possible exception of a brief period in 1998, that is. A combination of financial problems in Russia and south-east Asia, coupled with the collapse of hedge-fund manager, Long Term Capital Management, led to a swift sell-off in shares in the summer of that year. At the time it felt most uncomfortable. On that occasion, though, the disruption to the long bull market was relatively brief.

Buoyed by the technology sector, shares swiftly regained their upward momentum and little more than a year later were attaining levels that in many cases have yet to be regained, following the new millennium bear market. So, do these two events invite comparison with the market's recent behaviour?

Candidly I consider it wrong to take either event as a role model for the likely outcome.

Markets always travel too far ( in both directions. In 1987, the fall was as much a result of a lack of understanding as to how a burgeoning derivatives business would impact on the cash market as it was a necessary correction to a rise in share prices of unprecedented proportions earlier that year.

It is worth recalling that, despite the autumn mayhem, the FTSE 100 index actually finished the year higher than it began. Investors should take comfort from this piece of history.

Brian Tora is investment communications director at Gerrard Investment Management Limited
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Publication:The Journal (Newcastle, England)
Date:May 24, 2006
Words:528
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