Be careful about re-entering equity market

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Advisers should be preparing clients for the global financial market slowdown to last for several years, says Magellan co-founder Hamish Douglass.

Friday, November 7th 2008, 6:55AM

by Rob Hosking

Over recent years 70% of GDP growth in the developed world has been from household consumption, and most of this has come from borrowed money, he told a gathering of financial advisers in Wellington.

“About 50% of the global credit market has just gone to zero, and the other 50% is from banks but they have effectively gone onto life support.”

And much of the credit lines still existing are tied up supporting old, rather than new borrowing – a state of affairs not likely to change quickly, he says.

“None of this can be turned around in a short time. You will still find some economists out there saying the US economy might be out of recession the third quarter 2009.

“I think they are smoking drugs. I just can’t see it happening.”

For investors, he says, there are opportunities but warns against deciding the bottom of the stock market has been reached.

“There will still be a lot of volatility for at least 18 months…do not try to pick the bottom. Average out your cash. If you leap in too quickly, if you decide the bottom has been reached and wade back in too fast you will have some very angry clients.

“This could go on for 18 months, it could go on for two years, it cold go for more.”

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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