Investors still fear stock markets

BY Jamie Robertson Business presenter, BBC World

It is almost as if November never happened, and we are back in October.

Confidence has not returned to the stock markets

October was the month that most investors will regard as being, without exaggeration, the worst in their lives.

More alarmingly, perhaps, than just the falls on the broader market on Monday were the falls in the banking stocks.

The consensus seemed to be that the financial crisis ended round about October and the economic crisis began.

But a 22% fall in Citibank shares on Monday alone, a 21% fall in Bank of America and a 17% fall in JP Morgan Chase reminded us that an economic crisis will have repercussions for the finance industry that have not yet been priced into the markets.

As the car industry, retail, manufacturing and the broader service industries hit the buffers, their bankers will pay the price in bad debts and falling revenues - and let's not even mention the ghost of repossessions-yet-to-come in the still falling housing market.

Cheap shares?

The week-long bounce back up at the end of November in the global stockmarkets appears to have withered in around 24 hours.

Equities look cheap and they are going to get cheaper Bronwyn Curtis, head of Global Research at HSBC

Howard Wheeldon, senior strategist at BGC Partners says "it was an illusion, an illusion. No substance to it at all."

The burst of market enthusiasm seems to have been generated by a belief that prices had fallen so far that finally there was value to be had in equities.

Analysts pointed to the fact that in the UK and US yields on equities, that is how much companies were paying out in dividends, had, for the first time in yonks, risen above the yield on ten year government bonds.

What does this mean?

Well, for every dollar you spend on an equity you get a bigger flow of income than you would had you bought a dollar's worth of Gilts or Treasuries.

Does that mean equities are cheap and offering a great return?

Cheap maybe. Good return? Doubtful.

Safe haven

The problem is that too many companies, and the analysts that follow them, still have inflated ideas of the kind of dividend returns they are going to produce in the coming lean years.

Many investors just want to make sure their money is safe

"Equities look cheap and they are going to get cheaper," explains Bronwyn Curtis, head of Global Research at HSBC.

"There is going to be a great deal of cutting of forecasts in the coming months and a great deal of cutting of dividends, so the yields are not going to look so good in a few months time.

"People at the moment don't know where to put their money, but they know that at least if they put it into government bonds they are likely to get it back."

Little faith

The sheer weight of money going into the bond market partly explains why bonds continue to rise (and yields correspondingly fall) despite the alarming projections of the amount of debt that governments are going to have to raise through new bond issues.

The other, less comforting reason for the continuing strength in government debt prices is that investors refuse to believe that all that money being pumped into the economy is going to produce a recovery, growth, or even inflation.

All three of those things would push bond prices down and yields back up, and it is not happening.

The price of the benchmark 10 year UK Gilt has gained some 6% in the last three months alone.

With global interest rates racing towards zero which would you prefer to invest in?

A 10-year gilt (okay, expensive I know, but safe) offering a fixed rate of 4%, or a cheap share in Mega-Corp, with a 6% dividend (for now anyway), trying to make ends meet in the mother of all recessions?

"It's safety, purely safety," says Mr Wheeldon.

"In five years time we may look back and think this would have been the perfect time to buy stocks, but no one is certain.

So why not wait, and put your money in Treasuries and Gilts, which are safe?"

Mug's game

On top of that, company share prices are writhing around with a wild unpredictability that is hardly conducive to sensible considered investing.

Over the last month, BHP Billiton, for example, fell some 30% to below 800p before regaining almost all its losses.

Tesco was down 13% through November and on Tuesday, after some refreshing results, recovered 10%.

There is some thought among contrarian investors that the sectors that led us into the recession, house building and retail, will lead us out.

Well, yes, maybe.

And to be fair, the market has well and truly punished their share prices, so they may well represent the bargains of the century.

But if the bond market really is telling us that recovery, growth and inflation are still way, way, way off beyond the horizon, then buying stocks is still a mug's game.