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EDITIONS
Tuesday, 21 August, 2001, 11:33 GMT 12:33 UK
Where next for investors?
Many investors are confused as to where to put their money
Stocks have had a volatile year
Many investors had their fingers burned last year, as technology stocks came unstuck.

Entering 2001, many pundits advised caution, in part because their confidence in their own forecasting skills had been damaged by the previous year's volatility.

In January, markets recovered briefly with the first of the six US interest rate cuts - but they have since continued to fall throughout the year.

Is the time right to put your money back in the stock market, or should investors stay in hiding?

Last year's sell-off in technology and blue chip companies can be attributed to a few factors.

They could (still) lose half their money in a day...The Nasdaq went up 10% in one hit. That is a very volatile place to be

Peter Duffy, director at Independent Financial Services

Share prices rose so spectacularly, in part because investors piled into the market.

They did so in anticipation of high future profits for technology companies even though their current profits were non-existent.

As it became clear that it might take time for these profits to appear - if indeed they ever do - investors looked for the exit sign.

On top of this, many companies started to warn that profits would be lower than expected, as the US economy started to slow.

By cutting interest rates, the Federal Reserve has been trying to boost the economy and restore people's purchasing power - and George W. Bush's tax cut should also help.

If they succeed in reviving the economy, this should mean that the profit warnings seen in the US and elsewhere should eventually end - boosting share prices - but this process could be slow, warns Deutsche Bank's market strategist David McBain.

"There are still uncertainties about the extent of the slowdown, from the equity market perspective, we are still likely to see a string of disappointing news on corporate earnings," he said.

As low as it goes?

Earlier it was thought that the rate cuts might put a floor on the market and discourage further selling.

"This marks the bottom for the equity markets," Mr McBain said in January.

"In that sense, the travails of last year seem unlikely to be repeated over the course of this year. "

However, that optimism now seems misplaced.

Some reports suggested that professional investors had used the rally as a chance to take profits, and it is clear that there is little fresh money to support share prices.

In the long run, once the markets settle, some argue that technology stocks may not be a bad investment - especially at the bargain prices that are now available.

Mr McBain's argument is that equities aren't a bad place to put your money, given that the returns on bonds and the interest rate on cash probably won't go much higher.

Others are positively optimistic about the future of technology stocks.

"There will be money made in technology this year, these stocks have been slaughtered," said Graham Duce, managing director of independent financial advisors, Towry Law Investment Management.

But he cautioned: "If we see inflationary pressures, all bets are off."

Cash to spare?

What investors do now is also governed by how much money they have to spare.

"If a millionaire comes to me with 10,000, I would say go into biotech and tech, if someone with 10,000 came to me, I would say put it into a building society," said Peter Duffy, a director at Independent Financial Services (UK).

He expresses concern that people may read the headlines and assume it is "safe" to return to the market.

"They could (still) lose half their money in a day. The Nasdaq went up 10% in one hit, that is a very volatile place to be," he said.

He is still advising people to play it safe.


Analysis

Economic slowdown

Background

TALKING POINT
See also:

28 Dec 00 | Review
15 Dec 00 | Review
Links to more Business stories are at the foot of the page.


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