Friday's bounce gives opportunity to sell off shares

Published on Sunday 19 August 2007 00:17

IT WILL take strong nerves for investors not to panic over the coming weeks as stock markets continue their bumpy ride down. However, Friday's bounce in prices may open a window for the jittery to get out.

In general, the advice from experts is "do nothing". Share prices should bottom over the next few months, after which hopefully a recovery will begin.

Seven Investment's Justin Urquhart Stewart suggested: "If you are feeling seasick, don't look down at the choppy water below but stare out across the horizon. This storm will pass."

However, a temporary lull in the storm followed the Fed's move to ease liquidity problems by cutting the discount rate, which is what it charges to lend to banks. The FT index of the UK's leading shares rose by 205.30, closing at 6,064.20, after losing 4% on Thursday. This reflected a 10% drop since the market peaked in July at 6,754, although this was still lower than the all-time high of 6,950 in 1999.

Bank shares were among the worst hit amid fears the crisis in the US housing market could spread, uncertainty about their exposure to hedge funds and concerns about a looming credit crunch. Northern Rock, which relies heavily on loans from other banks and institutions, and which pioneered some higher-risk mortgages such as its 125% advance of a property's value, has seen punishing falls in its share price.

Privatisation stocks and those of former building societies are the shares most commonly held by small investors. The former mutuals continued to be heavily exposed to the mortgage market after converting to banks, and their losses emphasise the risks of holding all your shares in similar assets.

HBOS has the largest number of small shareholders, and its price is down from a peak of 11.67 last November to 8.90. Northern Rock's price has plunged from a peak of 12.51 to 7.09. Insurance giant Aviva, including Norwich Union, has fallen from its peak of 8.53 to 7.05, Standard Life is down to 3.05 from its high of 3.49, and Friends Provident has tumbled from a peak of 2.27 to 1.79.

Other sectors held up better, not least utilities, many of which are also privatisation shares. Food companies were also resilient. Telecoms fared less well, with BT shares closing on Friday at 3.08, down from a peak of 3.36.

Pension funds were badly hit, which is grim news for anyone retiring soon and still fully invested, although their pain will be eased slightly by higher bond yields, which should buy a bigger pension, albeit from a smaller pot. Where possible, they should attempt to delay retiring or taking their pension until markets hopefully bounce back.

The best advice is to hold on tight for the rest of the ride, and remember how quickly prices can bounce. They came a long way quickly from their previous lows in March 2003, when the Footsie hit 3,287.

However, there will be some investors who simply cannot afford to lose more money. If time is not on your side, then you could switch to cash, but you will still be crystallising a loss even after Friday's improvement.

You could switch to more defensive stocks, such as food or utilities, which people have to buy come rain, come shine. Similarly, there are guaranteed equity investments, which make sure you always get at least your original investment back.

Whichever strategy you adopt, keep an eye on your tax position. If you sell out of tax havens such as Isas, you may be surrendering a tax break for good.

Investors with the strongest nerves should keep cash ready to invest when the market looks like it might be bottoming out. But not yet. Urquhart Stewart said it is far too early to think about buying: "You would need to be a brave investor indeed to go into the market right now. It would be like tap-dancing on a peat bog."