London shares - bye, bye, bye or buy, buy, buy?

Shares on the London Stock Exchange slumped dramatically on Monday, 21 January 2008. The FTSE 100 share index ended the day down 5.5% at 5,578.2, taking the market back to a level last seen in June 2006 (read our end of day stock market report ).

The index of leading shares has now lost 13% in three weeks. The 323.5 point fall on Monday knocked nearly £77 billion from the value of the stock market with shares suffering their largest one-day loss since 9/11 in 2001. The London market suffered wild swings through the day, rallying more than 200 points off its lows at one stage. More volatility is likely. But the simple question is, if you're an investor, do you say "bye, bye" or "buy buy"?

It rather depends on your attitude to risk (as investing ultimately always does) but, here's the key point - unless you really need to take money out of the market you probably shouldn't sell right now. Remember the idea about investing is to buy low and sell high - not vice versa. In which case, you may even think that the falls represent a buying opportunity to pick up key shares cheaply and stash them away for a couple of years.

Buying Shares: 8 top tips on buying shares

Selling Shares: 8 top tips on selling shares

Lower interest rates likely sooner

What the market slide has done is increase the prospect of lower interest rates sooner rather than later - taking billions of potential liquidity out of the financial system and making it harder for companies to raise funds for investment, which is the key reason stock markets exist. Any suggestion of an increased likelihood of recession over here, as well as a recession 'over there' will also underline the need for the Bank of England to act - and that would relieve the financial pressure on hard-pressed mortgage payers as well.

However, the London share market was not the only sufferer and stock markets in Paris and Frankfurt showed larger falls, both down around 7%. In fact, markets around the world were slumping in reaction to worries about the US economy.

US President George Bush last week unveiled economic and tax cutting proposals to boost the US economy, co-incidentally also reckoned to be worth around £77 billion. However, the financial markets have decided that his plans just don't go far enough and appear to have persuaded themselves that the USA is definitely on course for the 'R-word' - recession.

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Sub-prime credit crunch fall-out continues

Recent announcements of massive losses by Merrill Lynch and Citigroup had only underlined the continuing problems being caused by the credit crunch, the sub-prime mortgage market wreckage and the complex debt instruments that had been created, the CDOs, to pass the debt around.

On January 17, US investment bank Merrill Lynch turned in a net loss of $7.8 billion (£3.9 billion) for 2007, against net profit of $7.5 billion in 2006, including a thumping $14.1 billion write-down of investments linked to sub-prime mortgages.

Two days earlier, Citigroup, the largest US bank, had reported a $9.83 billion (£5 billion) net loss for the last three months of 2007, caused by an $18.1 billion exposure to sub-prime mortgage debt.

Wall Street takes a holiday

Wall Street itself was not in a position to react to the market mayhem elsewhere. US financial markets were shut for the Martin Luther King public holiday. However, futures trading in the Dow Jones index suggests further falls to come - Dow futures traded down around 500 points! In fact, Wall Street traders had already taken a battering the previous week - the worst week for US markets in five years.

Indeed, it appeared that there was no hiding place for money on the day - the oil price fell back, dropping almost $2 to a six-week low below $89/barrel. A US economic slow-down would cut consumption and thus demand for 'black gold'. Even gold itself, the ultimate safe haven in time of crisis, dropped in price, down $17.49 to $864.05/ounce at 5.30pm EST.

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Robin Amlot
21 January 2008 © Moneyextra.com

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