£30bn is wiped off value of shares as war fears mount

Stock Market

The stock market plunged to its lowest level for more than seven years in London yesterday, wiping £30bn off the value of UK shares as fears mounted over the impact on the economy of a war with Iraq.

The FTSE 100 fell 122 points, or 3.4 per cent, to 3,480, its lowest since October 1995 and its 11th successive daily fall – a record losing streak in the 19-year history of the index.

The latest tumble in London means that the stock market is now worth about half the value it achieved when it peaked at 6,930 on New Year's Eve 1999.

"It's the 50 per cent January sales – everything is half price," said Justin Urquhart-Stewart, director of Seven Investment Management, a City of London stockbroking firm. But unlike during the massive price cuts in the run-up to Christmas, which brought shoppers flocking to the high street in record numbers, investors are very unwilling to wade into the market in search of a bargain.

The gloom was compounded by fears that Britain's big pension funds and insurers were being forced to sell shares to avoid falling into insolvency.

The market is now down more than 12 per cent since the start of the year that most analysts said would mark the start of a recovery after three successive years of falling prices.

Yesterday the experts were anxious to spread a "don't panic" message, although, perhaps understandably, they were a little cautious about when the recovery would start.

Henk Potts, a strategist at Barclays Private Clients, the stockbroking arm of the high-street bank, said: "Investors are facing a tough time, but you have to ask – is the world of capitalism finished and is this some sort of terminal decline?

"It may feel like that right now, but you have to say that we have been through down times and come out on top. It's easy to say, but don't panic.

"If you are brave enough and strong enough to buy, then will you make money by buying now? The answer is yes."

In the meantime, the market looks set to continue on its sickening roller-coaster ride, which can see billions of pounds being made, lost and regained, and then lost again, with every twist and turn in the journey towards a possible Gulf conflict.

Analysts believe it is this uncertainty that is sapping morale from the market. Yesterday afternoon's statement to the United Nations by Hans Blix, the chief weapons inspector, did little to buoy the markets, because it left open the issue of whether the US would use it to launch an attack.

"UN inspectors will probably get the time, which delays the inevitable action and further undermines the confidence of the US's ability to follow through with invading Iraq," said John Person, chief analyst at a Chicago brokerage. "Global investors have lost confidence in the dollar and economic stability is being questioned."

Markets on both sides of the Atlantic are now braced for the annual State of the Union address by the US President, George Bush.

Mr Potts said that in the long run the markets could gain from a short, sharp and successful conflict in the Gulf. He said that if the US seized control of Iraq's oil supplies this could bring down the price, which hovered above $30 a barrel yesterday, by as much as $5. "This would equate to an extra 0.3 per cent on GDP at a time when people are looking for an economic rebound," he said.

David Schwartz, a stock market historian with schwartztrends.com, said the lessons from market behaviour in previous conflicts, such as the 1991 Gulf War, was that shares fell as tensions built up, but rose once war was declared. "This is the most telegraphed war in history, so I'm pretty surprised we are still down," he said. "What is happening is that people are getting spooked. There's a certain amount of short-term trading that is making something happen that shouldn't happen, so I think we are going to see one hell of a rally."

He said he believed the market was close to a trough. "More often than not, those who sell out at the end of a sudden, painful sell-off, wind up selling out at the bottom," he added.

Other analysts said that war was just one element in explaining a fall on the London market that had gone on since the start of 2000.

Robert Barrie, UK economist at the investment bank CSFB, said share prices had simply surged too high during the dot.com boom of the late 1990s. "They have probably fallen below their long-run trend now, but unfortunately history tells us that a long period of over-valuation is followed by a period of correction," he said.

Mr Urquhart-Stewart said speculation about war had been around for some time. "Obviously it casts a longer shadow the closer you get to it, but people are now looking to next year and asking, 'Where's the beef?' "

He said growth was unlikely to come from the consumer economy. Households are saddled with a record debt burden, there are signs of stagnation in the housing market, the hike in national insurance payments will take effect in April, and there is talk of a "double dip downturn" for the UK economy.

"There are reasons to be cheerful – but I'm having difficulty coming up with three," Mr Urquhart-Stewart said. "If there is going to be a rally, it certainly won't be in the UK. People are looking at this country and seeing that we have one of the least enthusiastic chancellors towards business."

He said he was confident that the FTSE would be up in five or two years' time, but admitted he could not give such a guarantee for this year – or even this week.

A bigger issue is whether the current gloom will affect the wider economy. Mr Barrie said the falls were not driven by the state of the UK economy, which was robust. "In fact it is the other way round," he said. "Business investment is already down and the impact on pension funds could feed through to the consumer."

The other sector that is suffering is the City itself. The Treasury has already had to cut its forecasts for tax revenues because of the impact on profits and bonus payments. Yesterday, the Centre for Economic and Business Research said that one in 10 City workers – 35,000 people – would lose their jobs in the downturn.

This would in turn feed through to further falls in house prices at the top end of the London market. Yesterday Hometrack, a property website, said prices had fallen 0.5 per cent in January across swaths of the capital.