Hold Your Fire

06/23/2010 2:12 pm EST

Focus: GLOBAL

Deborah Owen

Columnist, The IRS Report

Despite the global markets’ recent bounce, a bigger buying opportunity is likely to turn up in the autumn, writes Deborah Owen in The IRS Report.

When your house is on fire and the fire brigade is called out, you are so relieved when they turn up that you don't give a thought to the damage that is being done by the water in putting out the fire. But after the initial relief has worn off, there comes the horrible realization of how much damage the water itself has created. Financial markets have reached a similar realization point.

After the relief that timely intervention by the authorities had pulled the international financial system back from the brink of collapse, the markets have woken up to just how large the fiscal cost of this bail-out operation was. We are seeing clear evidence of this in the credit markets. What started off as a subprime and credit derivatives crisis is spreading out to the sovereign debt markets.

Governments offered blanket guarantees to the banks and financial institutions, but the markets are now taking fright at how much these support measures have added up to. More worryingly, with national debt-to-GDP ratios running at such high levels, investors have begun to question how secure an investment is in the sovereign debt of the guarantors themselves. Following the escalation of the Greek debt crisis, this has now contaminated the whole eurozone. The failure of a German five-year bond auction to sell all the paper on offer shows the extent of investors’ doubts about the euro zone debt market.

Investor jitters have quickly spread to the equity markets. And, as so often happens, the move has been far sharper than even the bearish forecasters were expecting. Last month, I suggested we could see the major [FTSE] support at 5,000 being tested in the autumn, but the index has already dipped below this level.

The sharp sell-off took the market into oversold territory and, at the time of writing, there has been a sharp bounce, which has taken the FTSE 100 Index back above 5,000. The market often enjoys a good mid-summer bounce before being buffeted again by squalls in the autumn. Active investors may want to trade this rebound rally but with intra-day volatility so high, in order for a technical buy signal to be triggered, the FTSE 100 must climb back above its 200-day moving average, which is currently at 5,300.

For longer-term buy-and-hold investors, I still think we could see better buying opportunities and, if the market follows its usual seasonal pattern, these will occur in the autumn. It is at this point that readers should be looking to increase their exposure to the emerging markets.

But don’t be in too much of a hurry. As the luckless householder found out, his problems didn’t end when the fire brigade left—this was just the start of a long and difficult restructuring process.

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