This article was originally published here in July 2002
I am sure you have read about the recent turmoil on the world’s stock exchanges. Accounting scandals have been discovered in several top American companies and the fallout from this has affected share prices around the world. You may be wondering how an accounting scandal in America can cause a fall in the share price of British companies. Economists worry the recovery in the American economy will be slowed as consumers there loose confidence. There is an old economic saying: "When America sneezes the rest of the world catches a cold". The American economy so dominates the global economy that if it has a problem we all suffer.
One way of comparing the values of stock markets is to use the price earnings ratio of indexes that monitor stock market performance. The pe ratio for an index is calculated by adding together the market capitalisations of all the companies in the index then dividing that number by the sum of the earnings of those companies. Historical values show a rough rule is that a pe of under 10 means the market is cheap whilst a pe of over 25 indicates the market is overvalued.
The FTSE-100 index currently has a pe ratio of just under 20 whilst the pe ratio of the American S&P 500 index is over 40. This is as high as at the peak of the market in March 2000. Although American share prices have fallen, company earnings have also come down, keeping the pe ratio at the same level. If the American pe ratio is to come down to its historical average level prices must continue to fall or company earnings rise. If accounting scandals do affect the American economy then a fall in share prices looks a lot more likely than a rise in company profits.
Over the last three months the FTSE-100 index has fallen in value by over 11%. However, some sectors within the index have actually risen. Here are the six rising sectors and their gain over the past three months:
| Sector | Gain | Yield |
| Tobacco | 7.6% | 3.8% |
| Forestry & Paper | 7.4% | 5.0% |
| Household Goods & Textiles | 5.3% | 5.1% |
| Food Producers & Processors | 4.4% | 2.5% |
| Water | 2.5% | 6.9% |
| Personal Care & Household Products | 1.9% | 2.2% |
Conversely, here are the six sectors that have fallen the most:
| Sector | Loss | Yield |
| Media & Photography | -22.6% | 1.8% |
| Electronic & Electrical Equipment | -23.0% | 3.0% |
| Speciality & Other Finance | -24.0% | 2.7% |
| Telecommunication Services | -26.8% | 1.4% |
| Software & Computer Services | -36.1% | 1.3% |
| Information Technology Hardware | -43.3% | 1.3% |
As you might have expected, it is the "new economy", the Technology, Media and Telecommunication stocks that have suffered the most. Notable companies in the worst performing sector (Information Technology Hardware) are ARM, Marconi and Psion.
Tobacco is the sector that has gained the most during the past quarter. It is a very stable area to invest in - even in the depths of a recession people will still be consuming the product. The same goes for the other five sectors that have risen. I was surprised to see that the Beverages sector has fallen by 4%. Perhaps sobriety is coming into fashion.
Another point to note from these tables is the dividend yields of each of the sectors. The six sectors that have gone up have an average yield more than twice that of the six worst performing sectors. Mature companies paying a high dividend are seen as much safer bets than new, high growth, companies.
I hope this article has shown you that it is not all doom and gloom out there. Even though the FTSE-100 index has fallen by 11%, 22 out of the 35 market sectors have fallen by less. As long as your portfolio is not full of "new economy" shares then you are probably beating the market. If you are not, then buy some tobacco shares and take up smoking!