Warn of impact on local economy
Financial experts urge caution following US crisis

By Miriam Dunn and Kurt Sansone

‘Don’t panic – wait and see what happens’ is the message that experts in the investment sector are relaying to concerned clients.

As is the pattern in times of global crisis, share prices in international markets plummeted in the wake of the acts of terrorism on the US, sending markets reeling worldwide.

But financial advisors are urging investors not to react hastily to the events, thereby selling at a loss, but rather to think long-term.

In today’s edition, The Malta Financial and Business Times spoke to experts in the field, including Chris Pace of Globe, Joseph F.X. Zahra, chairman of Bank of Valletta and Godfrey Swain from HSBC.

Matthew Verdon, Sales Director of Africa & Middle East at Barclays Investment Management, explained that the bank’s own research shows that markets may suffer in the wake of a crisis, but usually rally afterwards.

"There might be paper losses for clients at present, but these will only be crystallised if they sell now," he explained. "Trends show that over a five-year period, substantial gains are made."

Their data, as evidenced in our graph, shows how the US market (in the form of the Dow Jones Index) has reacted to major world events such as the Gulf War and the Russian debt crisis. Trends showed that the market was marked sharply down initially, yet recovered strongly.

"We looked at the gain or loss on the index during the period that the news was breaking i.e. the reaction period and then looked at the market again at three points over the following six months," Mr Verdon said. "The picture that emerged was consistent……….the market was marked sharply down initially, yet recovered strongly. Whilst past performance is not necessarily a guide to the future performance of a market or markets, this research is illuminating and may serve to allay clients fears over the coming months."

Mr Verdon’s urge for caution was echoed by Mark Guillaumier, Chief Executive of Malta Stock Exchange.

"The effects of the ‘war on terrorism’ on the Malta Stock Exchange cannot be determined at present because one would have to wait and see how the situation develops on an international scale, Mr Guillaumier told The Malta Financial and Business Times.

He said that looking at the trading figures in the wake of the tragedy, there seemed to be no noticeable decline, which could be attributed to the event, in particular because the pattern of trading has been slow for a number of months.

"However, collective investment schemes whose assets are invested in foreign markets would have been affected in line with movements in those markets," he pointed out.

The chairman of Globe Financial Management, however, called for action from the Central Bank in the wake of the US crisis in the form of a drop in interest rates.

Chris Pace highlighted the fact that the world markets were still very volatile, adding that the situation would not improve unless some stability was put back into the markets.

"The major concern for investors including local ones is how long the crisis will drag on," he said. "It is anybody’s guess because it is a crisis with no precedent. Everything depends on how the US administration is going to react."

Mr Pace pointed out that most of the major countries have reduced interest rates to bolster consumer spending and help restore business confidence.

"I hope that the Central Bank does not take its time to follow suit," he said. "Interest rates must be reduced to ease the pressure on the local market."

The chairman of Bank of Valletta, Joseph F.X. Zahra, highlighted the extent to which the markets were already volatile.

"As the news is being flashed through the media of this global village - business and consumer confidence will naturally abate at a time when many indicators were already pointing at an economic slowdown in the USA and Europe," he told The Malta Financial and Business Times. "As an open economy, Malta will temporarily suffer on account of this situation as manufacturing exports will deteriorate, tourism will be even more volatile and the performance of financial institutions will reflect the sentiments of the international markets. This implies that our challenges for the next 12 months will be great."

"If US consumers do reduce their spending, this will have a direct impact on emerging market countries' exports and GDP growth, thus affecting external and fiscal balances. In this respect, countries with closer links to the US economy will suffer more."

HSBC spokesman Godfrey Swain said that although the IMF sees no global recession in 2001 – 2002, much will depend on the outcome in the coming days/weeks.

"International uncertainty will have an impact on the local economy particularly in sectors notably tourism," he said. "Investors in general, who were sitting on cash positions prior to the NY attack are unlikely to commit new funds to the market at this stage.

"Local investors appear to have so far remained on the sidelines preferring to wait for developments before taking decisions.