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Friday, 28 December, 2001, 15:31 GMT
Another torrid year for investors
NYSE trading floor
NYSE's trading floor: Investors praying for better times
Share prices in all the major global stock markets are on track to close the year sharply lower than they started, casting a shadow over investors' New Year celebrations.

The Dow Jones Industrial Average, the index of leading US shares which sets the tone for stock markets worldwide, is expected to settle 6% down on the year on December 31.

And with London's FTSE 100 and Tokyo's Nikkei set to close around 16% and 23% lower respectively, this makes the Dow Jones one of the better performing indices this year.

For UK investors, this is the second consecutive year that share prices have finished in the red.

Origins of the slump

The reasons behind the decline in the three main indices vary according to region, but the global collapse in share prices can ultimately be traced back to the end of the late 1990s technology boom in the middle of last year.

London Stock Exchange traders watch the FTSE drop
London's FTSE and Paris' CAC both finish down

The high-profile demise of internet companies during the second half of 2000 sent out a strong signal that double-digit returns on internet shares could not last forever.

Many investors quickly decided to stop putting money into the companies that make the hardware underpinning the internet, sending recessionary ripples into the wider technology sector.

US succumbs

Since many of these firms had borrowed heavily against future earnings, a wave of bankruptcies and corporate retrenchment followed, gravely undermining business confidence.

The equity market smells a recovery, but it is not forecasting a boom

Mark Tinker, Commerzbank strategist

In the US, this culminated in late 2000 in a sharp fall in economic growth as companies across all sectors decided they had been spending too freely, and cut back savagely on investment and recruitment.

Analysts now believe that the US slipped into recession as early as March this year, dragging large portions of the global economy with it.

In Europe, where investors never piled into internet stocks quite as keenly as their US counterparts, the fallout from the boom was not as severe.

But European telecommunication firms, which built up mountains of debt in order to buy licenses for untested third-generation mobile phone networks, provided their own version of the meltdown.

And then the 11 September attacks turned the share price downturn into a full-blown rout, with the Dow Jones losing a quarter of its value before finally bottoming out 10 days later.

Light at the end of the tunnel?

Since then, the three main global stock markets have managed to recover to pre-11 September levels, and many analysts believe a sustained rally will get under way early in the new year.

They point out that the October-to-December period has seen the FTSE's strongest gains since the final three months of 1999.

"The equity market smells a recovery," said Commerzbank strategist Mark Tinker.

"However, it is not forecasting a boom."

In the US, optimists say that businesses have nearly finished depleting unsold stocks, usually a sign that demand is about to pick up again.

And on both sides of the Atlantic, if not in Japan, interest rate cuts have helped to prop up consumer spending, staving off a classic economic contraction.

Recovery hopes overplayed?

But an equal number of pessimists warn that there is still not enough evidence of a recovery to justify a broad-based share price rally.

"People are pricing in an exceptional economic recovery next year rather than an ordinary one," said Jeremy Batstone, head of research at NatWest Stockbrokers.

"One has the feeling that some share prices have got ahead of themselves."

NatWest is predicting that the FTSE will end 2002 at 5,800, 11% up on the year, but still 15% off its 1999 all-time high.

See also:

21 Dec 01 | Business
US economy continues to stutter
17 Dec 01 | Business
New York's economy shrinks
12 Dec 01 | Business
False starts for US economy optimism
11 Dec 01 | Business
US recession may already be over
06 Dec 01 | Business
Mixed signs from US economy
07 Dec 01 | Business
Japan falls into recession
30 Nov 01 | Business
US economy shrinks fast
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