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Markets in free fall

The FTSE has entered a bear market as volatility continues to spread across the global money markets
It looks like global financial Armageddon across the world's stock and money markets. The shock of seeing the US credit rating demoted by one point to AA has led to widespread panic among institutional and private investors worldwide. The US dollar is not only the world's reserve currency but is also the domestic currency of the most powerful nation on earth. In Europe, the Eurozone is falling apart as debt caused by over borrowing sees country after country requiring enormous injections of cash from the International Monetary Fund. Germany, the strongest member of the European Union, is unwilling to carry the economies of Greece, Ireland, Italy, Spain and Cyprus. 

The Euro is under threat as a common currency among members of the Eurozone. It is likely to emerge as the German domestic currency with the vassal states of Europe linked to the Eurozone being demoted to second-class partners and being forced to accept Germany's euro exchange rate level on the world money markets. As such, they will have to dispense their own second-class euro currencies at a steep discount in order to attract buyers. Some will return to their original currencies, and it is likely that Greece will see the re-emergence of the drachma, which stood it in good stead for 3000 years.

The UK has stuck to sterling but is still wedded to the European Union and, therefore, must help bale out weak Eurozone economies. The UK economy, like that of the US, is approaching the second dip of the double dip recession and growth in both countries is almost at a halt. The Bank of England is steering the safest course it can by leaving UK minimum lending rate at a 360-year low point at 0.5 per cent. Regrettably, banks and building societies are not lending constructively new entrants to the housing market and Britain's three million small companies – the biggest single employer in the land – are being starved of cash. 

Given the scenario, investors in the UK stock market, who want to try their hand at 'bottom fishing' as the FTSE 100 keeps tumbling, are looking for bargains. They are also looking for safety and the prospect of capital gain. No one knows when the bottom of the stock market will be reached. In 1974 the FT 30 Share Index, the main indicator of the market's health or lack of it, bottomed out at 146 – a fall of 75 per cent from the previous high reached in 1972. It was at a level, adjusted for inflation, reached at the time of Dunkirk (1940), as the Germans stood on the Pal Calais ready to invade the UK.  

Safe haven

The safest sector on the stock market continues to be food and pharmaceutical shares, on the premise that people have to eat, and people will fall ill, recession or not.  Of the two, pharmaceutical companies look to be the better buy. Food retailers and manufacturers face wafer thin profit margins due to competition. Pharmaceuticals are major cash generators and have large stores of cash ready to increase dividends, carry out share buy backs and make astute acquisitions. 

Shire – possible bid? 

Shire Pharmaceuticals has outperformed the pharmaceutical sector by 30 per cent and has received a boost on unconfirmed reports of a takeover bid. Analysts at J P Morgan Cazenove poured cold water on this speculation, arguing that such an approach is improbable and 'would therefore prefer to add to positions when bid speculation has faded'.

Smith & Nephew see profits rise

Smith & Nephew, the medical technology company, saw first half profits rise by 3.2 per cent as demand for artificial joints rose, despite a flat orthopaedic market. The UK company announced pre-tax profits of £276m for the first six months of the year.

Malcolm Craig is a freelance financial journalist and author, having written 15 books on successful investment in a wide sector of markets, from the stock market to gold, from the money markets to gilts. 

9th August 2011

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