Forum Archive Index - October 2001

["Peter" <pmaiden@xtra.co.nz>]

This is an interesting view from investorschronicle.co.uk about what to do when falling profits hurt the sharemarket.

 

Does anybody have any views on the third point - do not blindly buy value or defensive stocks when earnings falter.

 

Or is the NZ market insulated from any further falls? Recent profit announcements would suggest that there is some (if not a lot) of more bad news to come.

 

The article (a British view) - 

 

Market view

Thursday 18 Oct 2001

Profit warnings could soon reach an all-time high and investors should look to tracker funds to diversify risk of earnings disappointments

It is going to be a cruel winter for company profits. A squeeze on profit margins, a collapse in overseas earnings and more BT-style write-offs of failed new economy ventures will all see to this. Pessimists believe profit warnings could reach an all-time high in the current quarter. Even optimists believe earnings will fall short of analysts' expectations.

Faced with this unpleasant prospect, there are four things we must not do.

First, we should not expect the market generally to fall. It's possible - but by no means certain - that investors' increased appetite for risk will overcome disappointments about near-term earnings.

Second, we should not waste much time trying to spot likely company failures. The fact that many professional analysts were bullish about Railtrack, Marconi and Independent Insurance before their collapses shows that even the experts cannot see failures coming.

Third, we must not blindly buy value or defensive stocks. Value stocks tend to do badly when earnings falter. And defensives would not participate fully in any market rally caused by a rise in investors' willingness to take risk.

Fourth, we should not rely too much on a recovery in technology stocks. Many market strategists believe these are most vulnerable to earnings' disappointments. They are also at risk if investors' appetite for risk fails to improve. Instead, one solution to the threat of lower earnings is simply to hold tracker funds. These diversify the risk of disappointing stock-specific earnings news as much as possible. They are not perfect, and investors should not hold them to the exclusion of all other risky assets - let alone safe ones. But now is not the time for perfect, clever answers.