As anticipated, we are seeing further fallout from the dramatic events that have shaken the financial system in the last two weeks. The rapid pace of rescue measures and bank takeovers has caused significant nervousness in world markets, with investors unsure as to where the next issue will arise.

Many had expected the US Congress to agree to a $700bn bail-out plan that would have bought poorly-performing assets from banks and helped the US economy get back on its feet. When Congress voted down the plan, it caused markets across the globe to fall sharply.

However, governments around the world continue to show willingness to act to restore confidence in the banking sector. For example, on Monday, the UK government nationalised the Bradford & Bingley and the Belgian authorities orchestrated a rescue plan for European bank Fortis. It is likely that the US will eventually produce an alternative plan that, if adopted, should help stabilise the system.

As yet, it is too early to establish what the full consequences of these events will be. But amid these extraordinary times, it is worth reflecting that news of the US bail-out on September 19th caused the largest one-day rise in the FTSE 100 ever recorded: 8.8%. Such extreme and unusual volatility can be unnerving for investors as short term movements in share prices are often driven by sentiment and do not tend to reflect the real long-term prospects for the economy and individual companies. In periods such as these, investors need to step back from the emotion of the immediate situation and consider the true long term position.

As Warren Buffett, the world's richest man, has shown with his bold investment in Goldman Sachs, these types of conditions can engender an ideal environment to purchase potentially strong performing companies at low prices.

At Jupiter, our approach remains cautious and our strategy is to invest in high quality companies with solid balance sheets that have the ability to grow in a difficult environment. It is part of the skill of Jupiter stock-pickers to identify which companies are likely to do well for investors over the medium to long term and emerge from this crisis in stronger positions than they entered it. It is also in such volatile conditions that the practice of drip-feeding investments into the stock market through regular savings schemes can prove beneficial.

Questions and Answers

What has happened?
Dramatic events have again taken place in the American financial system and across the world. More banks have had to be rescued including Wachovia in the US and Fortis in Belgium. In the UK, Bradford & Bingley was nationalised. The US Congress voted down a $700bn bail-out plan put forward by Hank Paulson, US Treasury secretary, that it had been widely expected to pass. As a result, stock markets across the world reacted sharply and they remain extremely nervous.

What do these events mean for markets?
While the immediate impact has been for share prices to increase their volatility, it is too early as yet to say exactly how stock markets will assess these events over the longer term. Investors will need some perspective, which only comes with time, to work out how the failure of the rescue Bill to pass through Congress will affect markets and other institutions. Meanwhile, the market is already anticipating a revised plan from Mr Paulson. This may take some time to be voted upon due to a Jewish holiday which has meant many Congressmen leaving Washington. 

While US authorities have shown they are prepared to let investment banks such as Lehman Brothers fail, it remains the key responsibility of authorities in the US, Europe and the UK to protect individual depositors and the banking system as a whole. One would expect the authorities to step in immediately to protect a deposit-taking institution that ran into difficulty.

How do today's events affect individual investors?
While problems at individual institutions have been recognised since the credit crunch started, the coincidence of several major events happening simultaneously in so short a period has rocked world markets. This will result in a period of heightened volatility and, as often happens during significant world events, investors should expect to see share prices suffer across the board, almost regardless of the real prospects for individual companies.

At the same time, many will expect this upheaval in the financial markets to translate into further economic woe as credit problems spread into the wider economy. It will, however, increase the probability of interest rate cuts by central banks. This should help the struggling mortgage market, ease the pressure on consumers and eventually stimulate the economy into recovery.

Investors will need to look through these events and realise that such uncertainty ultimately creates the sort of exceptional buying opportunities that leads to sound long term investment. It is worth bearing in mind that, despite a dramatic sell-off of the FTSE 100 in recent days, markets have seen worse. The greatest ever drop in a single day was on 20th October 1987, otherwise known as the day after Black Monday when the market bottomed.

Investment strategies during periods of market volatility
Anyone wishing to consider their investment options is strongly advised to consult their independent financial advisor.

However, while past performance should not be taken as a guide to future performance, it is worth bearing in mind some widely accepted precepts of investment. For example, research has shown that the longer you stay invested, the greater the likelihood that you will make money. Those who resist the temptation to "time" the market, i.e. make significant changes to their portfolio during times of short term market movements, are less likely to miss out on the gains when they happen.

Understandably, investors can be cautious of committing lump sums to stock markets during periods of high volatility. However, the risk of major misjudgements can be mitigated by investing incrementally through a regular savings scheme. These plans buy fewer units or shares when prices are high and more when they are low, helping to smooth out the peaks and troughs of equity markets. At the same time, any market falls in the early years of such schemes often prove beneficial, as those making initial investments can pick up units or shares at more attractive rates than during a bull market.

NOTE
The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances. They are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.