Stephen Whittaker comments on global equity correction


Stephen Whittaker, joint chief investment officer

"Corrections are a natural and more importantly, healthy aspect of equity markets. Shakeouts remind investors to price risk accordingly and not to presume that the stock market is a one-way bet. The last time investors were unnerved was back in May last year when inflation and growth concerns conspired to knock confidence. As then, markets had been on a prolonged bull run and investors were beginning to become unhealthily complacent. The fact we have gone nearly eight months without any serious falls has only served to heighten the shock of the recent setback.


"The events of last year are a useful reminder that it rarely pays to try and time the market. Anyone who panicked and sold in the month long correction between mid-May to mid-June of last summer would have missed out on some attractive gains. By the end of 2006 the FTSE All-Share Total Return Index was up 16.8% from the start of the year so riding out the fall rewarded investors over the longer term.


"If anything, the economic and corporate background today is more supportive than last summer. The market has managed to survive a high oil price, a slowdown in the US housing market and higher interest rates. We are currently in a phase where the US housing market is showing signs of recovery, oil is cheaper and central banks have rebuilt their monetary arsenals should the economy need assistance from lower interest rates. The big unknown is Iran but the impact of global politics on equity markets is almost impossible to predict, however, it is worth remembering that the last time the US waded into the Middle East in 2003, it actually marked the start of an equity rally.


"We may see a little volatility in 2007; however, I foresee no reason why the equity market cannot finish the year in positive territory - probably near the 7,000 mark."


The views and opinions expressed in this commentary are solely those of the author at the time of writing and therefore may not be an indication of New Star's house view.

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