Stockmarkets down? The profit-hunters ponder...

• - The “credit crunch” is the root cause of stockmarkets’ current woes
• - We think that the selling of equities has been indiscriminate, failing to distinguish between the good and the bad.
• - The current situation is likely to reverse sharply. Investors will look back and wonder why they hesitated to buy at such valuations.

Why are stockmarkets so depressed and nervous? However innocently, banks have once again lent unwisely - as they always do at some stage in the cycles through which economies and stockmarkets turn. Caught up in labyrinthine acronyms like CDOs (collaterised debt obligations) and such things, let alone sub-prime mortgages, banks’ balance sheets are under strain. The result, leaving aside all the technical jargon and numbers, is a collective, comprehensive and chilling lack of confidence.

This is expressed through “tightening” in the supply of credit. Companies and investors with cash are cautious about lending to banks, and banks are reluctant to lend to each other or to customers. If they do, it is at a much higher interest rate than before. So credit, which oils the economy, is not only in a short supply but has become very expensive.

An example of that “tightening”, much closer to your homes and ours, is mortgages. We’ve all seen interest rates coming down - but mortgage rates going up. A recent survey of more than 300 Citizens Advice Bureaux across England and Wales found a 35% increase in mortgage difficulties in January and February, compared with 12 months ago. Hence the eloquent term, much bandied about, “the credit squeeze” or, as it’s called more commonly these days, the “credit crunch”.

We think that the flight to risk-free returns (like cash and government bonds) will prove mistaken. It is driven more by fear than by economics. The selling of equities has been indiscriminate, failing to distinguish between the good and the bad.

Two other factors have contributed to making a bad situation even worse: (1) the “leverage”, otherwise known as borrowing, by some investment funds (though not unit trusts like ours, which aren’t allowed to borrow). (2) Forced selling by investment funds to meet redemptions. Both these factors are, we believe, already showing signs of settling down.

History is clear that, over the longer term, equities outperform other forms of investment. The Artemis range of retail funds was designed and is managed for longer term investors. Those of our investors who have held units for some years have seen good gains - despite bouts of volatility from time to time. We believe firmly that this is not a time to panic. It is a time of opportunity.

Source: Internal as at 26 March 2008.