First signs of a rally?

Shareholders whose capital has been decimated are seeing their income slashed by dividend cuts, says Richard Northedge. But with the market at its lowest ebb since 1996, are we close to the bottom?

The simple principle of stockmarket investment is to buy at the bottom and sell at the top. It’s telling the nadir from the zenith that makes it hard. Investors were still buying shares in 2007 because, while markets were clearly off their lows, the blind belief was that they had not reached their peak. But now that the market has fallen so far, should we buy or should we be belatedly selling our shrunken portfolios before they fall further?

With the pension year and ISA season about to close, it’s a brave investor who chooses to throw good money after bad by putting more money into the market.

The FTSE-100 index has been lower in recent days than it was in 1996. Except for those who caught the brief bottom of the market in 2003, no one who bought the index in recent years is showing a profit.

Some shares are back to 1980s levels; many are below their flotation prices. Any investment in a pension before 5 April will have merely helped refill the pot to last year’s level.

Investors who bought the FTSE in mid-2007 would need markets almost to double before they show a profit but equities have proved a bad short-term investment. Anyone who invested at the end of the 1990s needs a rise of about 100 per cent to break even for now. As that is unlikely before the next decade, the theory that equity investment always works in the long term is being tested severely.

For the moment, most shareholders would be content simply to see signs that the market has stopped falling. Yet credit crunch has been followed by recession. The problem is no longer just companies that cannot borrow, but customers who are unwilling to buy. Sales are being hit and profits squeezed. Shareholders whose capital has been decimated are seeing their income slashed as companies cut or abolish dividends. Even groups such as Aviva, which optimistically increased their interim payments in 2008, have cut the final by the same sum this year: that might allow the insurance giant to claim it has maintained its annual payment, but its trend is now definitely downward, putting future dividends in doubt.

1 | 2 | 3 | 4 | 5 Next page