By Bobby Rakhit 24/01/2008 11:21
Times have become uncertain. The pound is beginning to wane and the US markets seem to be slipping into hibernation.

This has had some repercussions in the global markets however we believe these are temporary glitches as the emerging markets will continue to charge on particularly in the Middle East, China and India. In this midst of chaos, safe havens are quite often referred to.

For the common man a safe haven is usually regarded as an investment that would lose little of its value in the event of a stock market crash. In more technical terms it’s an investment that has low to negative correlations with other investment vehicles. Examples of these could be gold, utility companies and some emerging markets.

Gold Shines

Source: FactSet Research Systems, Inc.

Gold shines in times of uncertainty. In the early 1990’s gold clearly had stable value while the FTSE made a nice run. Alternatively in recent times things have altered, FTSE has struggled while gold has dramatically risen. In the table below we have a correlation matrix of FTSE sectors, gold and several large markets. The relationship between gold and the FTSE All shares stands at around 20%. As such it tells us that the two variables are weakly related, but it does not allow us to come to any conclusions about cause and effect. We have to look to other statistical variables.

From the table below we classify safe havens as vehicles that have a weak relationship or negative relationship with the FTSE All Share and other global markets. Utilities, pharmaceuticals and personal care product industries fall into this category.

Brace yourself as the markets will continue to be choppy. We believe correlations will play a large part in security selection over the coming year. Staple demand and utilities will be key sectors along with gold and other precious commodities.

Correlation Matrix

Source: FactSet Research Systems, Inc

Highlights:

FTSE All-Share spirals downwards. Down -11% MTD in January.

Sectors get hammered! Real Estate and Health barely survive

The UK trading at a 15% discount to its historical price earnings

Utilities and pharmaceuticals should hold the fort.

In the Numbers

FTSE All Share 2007 EPS growth rate ends at 6%, which has been revised down 1% from the beginning of the year.
2008 still looks strong with analysts expecting 8.5% profit growth for the FTSE

Scorecard: Performance of the FTSE All Share (Excluding Investment Trusts)

Source: FactSet Research Systems, Inc

These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For any comments please contact rakhitreport@yahoo.co.uk.