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Monday, 10 September, 2001, 11:35 GMT 12:35 UK
Q&A: Why the collapse affects you

On Monday, London's FTSE 100 share index dropped below 5,000 points, while stock markets around the world were also performing atrociously. BBC News Online explains why collapsing shares affect pretty much everyone.

I'm not a stockbroker: Why should I care about falling share prices?

You may never have consciously bought or sold a share, but collapsing stock markets can still have a nasty effect on your wealth.

Many people are "indirect" investors in shares - in other words, their pensions and other savings schemes are tied up in the stock markets.

Over the past decade or so, share ownership has become much more widespread in the UK, especially since the mass privatisations of the 1980s.

And the prolonged stock market boom of the 1990s has seen many large pension funds shift a greater proportion of their holdings into stocks, and away from traditionally safer investments such as government bonds.

This is having unpleasant consequences.

Although people have some say in how their pension funds are invested, some big investment companies have started to slap heavy exit fees on clients who want to get out of the stock markets.

And although we have always been told that the returns from shares are better than those on bonds in the long term, that is not true at the moment.

What if I don't have a pension or other investments?

You are still at the mercy of the markets.

In the past few years, British companies have become ever more conscious of their share price.

A low share value makes it harder for a company to operate - affecting its ability to raise money or complete acquisitions, for example.

That, combined with the rise of the shareholder culture, explains why companies will go to often drastic lengths to support their share price.

The most common measure is to cut costs - usually by shedding staff.

So a collapsing market could make your employer less successful - and it could cost you your job.

But what if I don't work at a company whose shares are listed on the stock market?

There's still no escape.

The stock markets have a far greater economic reach than they used to.

With so many people - directly or indirectly - having investments in the market, and corporate activity so easily influenced by share prices, a falling market sharply reduces the amount of general affluence in the economy.

People have far less cash to splash around in thin times, and prefer to keep their wealth locked up in the bank.

This directly affects consumer spending, and especially sensitive markets such as house prices.

In London, the most extreme case, the boom in house prices has been largely fuelled by personal wealth linked to buoyant investment performance.

In the longer term, it can harm a country's economic performance, leading to shrinking output and redundancies across the board.

In the United States, where share ownership is near-universal, the correlation between market performance and broad economic health is extremely close.

In Britain, we are a little shielded from this effect, but not wholly.

So why are the markets crashing?

There has been a worrying combination of events.

Early last year, the once-heady share values of high-tech firms collapsed, as investors for the first time started to question the fundamentals of the internet economy.

For most of 2000, this was a purely localised phenomenon, and "old economy" firms - such as airlines, car makers, banks and so on - continued to prosper.

But this year, after almost a decade of robust performance, the global economy started to sag, led mainly by the long-anticipated end of the US boom.

America's slowing, combined with worse-than-expected performance in Asia and Latin America, has led to Europe suffering much more than had been forecast.

Now, the UK, which for a while stood out as a bastion of economic good health, is catching a cold.

The surprisingly rapid economic slowdown has dramatically undermined the performance of companies across all sectors, as the assumptions on which they based their output targets have been proven over-optimistic.

This year, it has been rare for a firm to meet its profit targets, and while some are still doing well, investors seem to have generally lost faith in corporate performance.

As gloom in one market infects the performance of the next, the cycle of depression seems uninterruptible.

When will things pick up?

If anyone really knew the answer to that question, they certainly would not tell you.

A turnaround in stock markets has been imminently forecast for most of the past year, but has stubbornly refused to materialise.

All things being equal, a drop in the markets is usually seen as a buying opportunity, as investors spot shares that are undervalued in relation to their fundamental worth.

There has been much discussion of undervaluation this time around.

But no one wants to be the first to decide that shares are being sold too cheaply - pretty much all investors are waiting to see how low things can go.

In share traders' unpalatable parlance, they are waiting for the "bottom" to form.

That bottom won't form until enough people buy, and no one will buy until the bottom forms. Catch-22.

If it's so serious, why does no one do anything about it?

Who is going to intervene?

Many in the financial sector might like to see a bounce, but share traders can make money from a falling market almost as easily as from a boom.

And no bank is going to be happy to interfere with the mechanisms of the free market.

The government might seem a more likely white knight.

In the past, some governments around the world have been willing to push public money into the markets, in an effort to stave off collapse.

But that won't happen in the UK.

For a start, such interventions are rarely even temporarily successful, resulting in nothing more helpful than a massive state subsidy of the investment community - scarcely a sound political move.

More to the point, state intervention would represent a snub to the sort of free-market policies that almost all Western governments at least nominally follow.

Britain's economic partners would be profoundly offended at any attempt to tinker with the markets.

Pretty much everyone may be unhappy at the present state of affairs.

But like it or not, that's capitalism.

View market data
Launch marketwatch
The Markets: 9:29 UK
FTSE 100 5760.40 -151.7
Dow Jones 11380.99 -119.7
Nasdaq 2243.78 -28.9
FTSE delayed by 15 mins, Dow and Nasdaq by 20 mins

Analysis

Economic slowdown

Background

TALKING POINT
See also:

10 Sep 01 | Business
FTSE drops below 5,000
10 Sep 01 | Business
World stock markets slip lower
14 Mar 01 | Business
Why stock markets matter for you
07 Sep 01 | Business
BA risks FTSE rejection
10 Sep 01 | Business
Hi-techs to leave FTSE index
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