Beware of the stock market bear - is a correction inevitable?

Some City commentators say a stock market correction is due. If so what should private investors do? The FTSE 100 may be three times higher than it was back in 1992 but a closer look at the "market cap" value of the stocks at the lower end of the index reveals that they have not increased much during that time.

Recent takeovers, mergers and acquisitions have inflated the index to a six year high this week to a level at just over 6,500. Alliance Boots and Sainsbury have been the subject of private equity bids and Barclays is eyeing up ABN Amro. All these stories led business headlines throughout the past few weeks.

The financial markets appear strong and everything seems in good stead for investors, unless you listen to a growing number within the City walls who believe that a sharp correction is inevitable.

Private investors, therefore, need to be stock selective when deciding to invest. Don't forget that only in February of this year price levels across the board plummeted. The FTSE 100 lost over 300 points in two days and then fell, albeit briefly, through the 6,000 level in early March. Since then the pound has broken the $2 barrier, causing concern for exports and firms that have operations within the US.

Optimists of course believe that the recent stock market volatility was simply a temporary blip, and fears about oil, the Middle East, inflation and US sub prime lending, have already been factored into prices.

Fund managers more fearful?

However, a key group of name have voiced their concerns. Ken Murray, a UK fund manager, has sold 50% of his equity holdings and expects a US recession to wipe 20% off world markets. Neil Woodford, fund manager at Invesco Perpetual believes that turbulent times will become commonplace and the Chief Economist at Morgan Stanley wrote recently, "The bursting of two bubbles seven years apart dot com and housing holds the key to the macro outlook. In 2000 it was believed that the economy and the markets would remain unscathed. Just as that view turned out to be wrong, I fear a similar outcome today."

23 April 2007 © Moneyextra.com

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