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Recession fears plague market

NOBODY can accurately predict the effect on financial markets of the attacks on the World Trade Centre. None of us has lived through an attack of terrorism of this magnitude. While terrorism in some form has always been with us, an act of this magnitude is unprecedented.

Despite this, let us look at the possible impact of this tragedy on financial markets world-wide.

The most likely outcome of this is the increased possibility of the US going into recession. Up to this time the US has been hanging on to a "non-recessionary" environment purely due to the confidence of US consumers. This tragedy is going to severely dent that confidence and put the US on the precipice of a recession.

Depending on the US response to the attacks, there is a distinct possibility of higher oil prices. This could not have come at a worse time, with the Northern Hemisphere moving into the winter months, the peak oil usage period. Higher oil prices will certainly add to the recessionary worries.

Weaker economic environments exist all around the globe. The US still represents more than 50 per cent of world capitalisation. Any recessionary impact on the US will flow through to the rest of the world.

A lot of the assessments of the impact of the attacks will not be known for some time. The accuracy of the predictions will also depend on the response that we see from the US.

The likely response from the financial policy makers is far more predictable. In an environment of likely recession, the immediate response from Dr Greenspan and all his equivalent financial market leaders will be to cut interest rates. This cut in rates will be designed to try and restimulate the lost consumer demand. There also is little doubt that the cuts in rates will be global. It will need to be in order to regenerate world economic growth.

Again, depending on the response from the US, there is a possibility that OPEC will increase oil production to assist the struggling global economy. This will need to be done for the duration of the winter months at least.

If the two policy responses (the cut in interest rates and the increased oil production) occur, then the recession will be a short and sharp one. However, the OPEC oil production scenario is the one that is harder to forecast. This is going to be very dependent on the US military response.

Assuming we have the outcomes as suggested above, what do we need to do insofar as our investments are concerned? In this environment of uncertainty, the preferred asset class would be cash, followed by bonds and lastly equities. This would reflect a flight to safety that would attach itself to the psyche of investors.

But, at the same time as recognising that cash is the preferred asset class, it must be emphasised that this is not to suggest wholesale sales of your assets. I, for one, would remain fully invested.

There are sectors of the market that are going to be in far worse condition than others. The insurance sector will feel the effect of the claims for some considerable time. Already, the speculation in Britain is that Lloyd’s of London has an exposure of about 30 per cent to the World Trade Centre building and possibly some of the other buildings. The airline industries worldwide will be affected severely for some time. The financial services companies also are likely to feel the impact of this tragedy. All of this will lead fund managers and investment advisers to rearrange their portfolios to reflect the changing conditions.

Some industries will gain from the additional US spending that will be required in order to rebuild New York and the Pentagon.

Among these will be property developers and construction engineers who will gain from the additional spending. There also will be a considerable amount of money spent on security proofing some of the government buildings and there are companies in these industries that will benefit.

It must be emphasised that much of what I have indicated above is to a great extent speculation as to what may happen.

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