Justin Urquhart Stewart is one of the most recognisable and trusted market commentators on television, radio, and in the press. Originally trained as a lawyer, he has observed the retail market industry for 20 years whilst at Barclays Stockbrokers and developed a unique understanding of the market's roles and benefits for the private investor. Justin provides financial advice to clients of Ashton KCJ Financial Planning LLP.

Date: 21 October 2011
Author: Justin Urquhart Stewart

So just how frightened are we?  I am sure many will recall Clint Eastwood’s memorable line as Inspector Harry Callahan points a huge magnum (revolver, not ice cream) at a flailing and failing bank robber - “Do you feel lucky, punk?”  Now just replace punk with the term “punter” and I can almost hear a similar intonation as the stock traders and bookies urge the would-be investor back into the market maelstrom. But is that so the punters can make money or so they can make commission?

Of course in erratic days such as these, there are going to be times when shares and other investments will have dropped a great deal, and of course to some may well appear cheap. But does cheap mean good value? Not necessarily - especially if they were overvalued in the first place. However, for the discerning investment manager and, come to that, the thoughtful private investor, there are certainly opportunities for those who have the heart to see through such stormy times.

Maybe it is timely to remember some of those old bon mots from the Sage of Omaha, Warren Buffett.

1. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not re-open it for five years.

2. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Homely little phrases they may be but nonetheless they are very sensible. After all, the market gyrations at the moment are based on economic fears, not corporate ones. Yes of course companies will be impacted by weaker economies, but you can tell from the index behaviour what they are reacting to. The slightest whiff of political initiative (now there is a rarity at the moment) and you add on a couple of percent; follow that with a nervous threat of impending recession and you can knock off the 2% again.

If you fear Armageddon then it is pointless worrying. Just grab the whisky and run for the cave. However, if you think Armageddon will be delayed due to lack of interest, then maybe take a longer view and follow the demand for business and money. Despite a recession (and in all honesty we probably aren’t quite done with the last one yet) money still gets spent and there is still demand, but just at a lower level. As I mentioned last week it will be those big businesses with a global reach that will still be operating in a healthy manner. From food to healthcare, from infrastructure to power generation, demand will continue in spite of, and in a few cases because of, the economic weakness.

So here then is a more solid investment route to consider. When equity values are unreliable, government debt overvalued, cash returns running at below inflation, consider the old and most trusted investment tool - compounding. My colleague Chris Birch kindly looked out the Barclays Capital Equity Gilt Study just to remind me of the figures.

£100 invested in the equity market in 1945 would now (as of last year) have a nominal value of £7,932 - although after inflation sadly only £255 in real terms. Meanwhile, had you done the same calculation but with dividends being reinvested, the figure leaps to £136,107 although once again inflation reduces this to £4,370.

What I find interesting as I go around the country is just how many businesses have adjusted and resized themselves to the new economic conditions and are operating profitably and successfully, albeit on a smaller scale. From estate agencies through to manufacturers and even to certain retailers – adapting is the name of the game. This last group seems to have borne the brunt of the economic change as we saw with the latest figures from even the doyens of the UK retail world, namely Tesco and John Lewis. However, even here as personal budgets and debt are adjusted, a new level wil be found and it is from there that the early shoots of growth will start to appear again. Also look overseas and we can still see - despite their forecasts of doom - that Eastern consumers are still spending even though the outlook coming from China is weaker. For Tesco and Burberry oriental strength has, to an extent, been balancing out occidental weakness.

Meanwhile while political whims continue to provoke wild market gyrations, that will change and it will be the emergence of credible political policies and leadership that will be the trigger. Stand by everybody!

I am indebted to my colleague Ros Price, our Chief Investment Officer, who pointed out the contradiction in government securities these days. Sovereign debt used to be a "no risk yield" but given the current valuations they are probably better termed a "no yield risk!"

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited