The prospects of market recovery

July 27, 2009
Shares

, NAIROBI, Kenya, Jul 29 – Equity markets have rallied strongly over the last few weeks. This is a considerable feat considering the disastrous start to the year. Yet many investors remain on the sidelines.

It is human nature to wait for evidence of the recovery before getting back into the market after a painful slide. However, owning stocks in the early stage of an economic upturn has often proved profitable. Waiting for all indicators to turn positive risks missing a considerable proportion of a bull market’s gains.

Most investors are cautious about entering the market too soon after a downturn because they believe that the moves of recent weeks are nothing more than a bear market rally. It is said that the slide endured during the Great Depression was characterised by no fewer than six bounces as dramatic as the one we have seen in recent weeks.

Earlier in this downturn, mini-rallies were triggered by the announcement of government intervention. In each case, further failures and the need for new assistance soon put paid to any optimism. The recent improvement feels like it is built on something more substantial than hope – it is underpinned by a widespread improvement in macroeconomic data and financial conditions.

The headlines have been painting a grim future about market prospects. For instance, the Japanese and German economies spent the first quarter of this year shrinking at its fastest rate since records began. While these headlines paint a dim view of the world, business confidence is beginning to rise across the globe.

The early stages of an economic recovery are usually marked by fits and starts. While some leading indicators remain negative, others have either improved or their rate of deterioration has slowed. These signs of stabilisation have fuelled the recent stock market rally and yet many investors still seem to be waiting for sustained improvement to confirm a bottoming of the economy. There are no guarantees regarding the timing or the magnitude of any potential economic recovery, but historical analysis shows that owning stocks in the early stage of an economic upturn has often produced favorable results.

Investors need to realise the long term benefits of owning stocks or shares when making their investment decisions because waiting on the sidelines could be costly. It is also important to understand the fundamentals on which equities operate. The share price of a company can fluctuate for a variety of reasons, such as good or poor performance, market conditions, the views of investors or other factors.  For this reason, shares are higher risk than cash or bonds, but they generally offer the best prospects for growth if you are able to invest for a number of years.

The advantages of shares are listed below:

•    Shares can increase significantly in value
•    Dividends can increase as company profits rise – these can usually be reinvested or paid out as an income
•    Shares tend to perform better than cash over the long term

Irrespective of the investment decision you choose to make, you should consult an investment advisor. In the case of investing in equity, it could be important to also look at professional investment managers who will. Rather than buying shares yourself, you can have a professional expert look after your money in a managed fund.  Money from thousands of investors is pooled together, and the fund manager then buys a broad selection of shares thus giving you a diversified portfolio. This has several advantages. Firstly, it can increase your portfolio’s growth potential, as you’re in better position to take advantage of more opportunities. And secondly, it can help you manage risk, since it ensures that if individual shares perform poorly it does not have a disproportionate effect on the growth of your portfolio as a whole. In other words, the advantage of a diversified portfolio is that it can make your returns more consistent.

The advice for investors is you need not be discouraged by the economic downturn and do not delay your investment decision as you wait for markets to bounce back. The time to invest is now.

Shares

Latest Articles

Stock Market

Most Viewed