Phew! What a stinker!

For equity investors, the best that can be said of 2008 is that it is almost over. Those that have steadfastly stayed with the stock market for the past 12 months will need no reminding of quite how bad it has been, but a few statistics swiftly sum it up. It was a year in which: There was only one day on which the FTSE all-share index closed above the year’s opening level – and that was January 3. Only two shares that started the year in the FTSE 100 produced double-digit percentage gains, and just six produced any gain at all – in contrast to the eight that fell by more than 80 per cent. At its worst, on November 21, the FTSE all-share had lost nearly 43 per cent of its value – and yesterday it was still down more than 35 per cent.

In short, 2008 was the worst year for equities since 1974 (when they fell 54 per cent), and the second worst since 1929.

So what did we learn? It is hard to draw too many lessons from a year in which the unthinkable so swiftly became hard financial reality: the Government rescue of three of Britain’s biggest banks; the Bank of England cutting base rates to their lowest level since 1952; oil prices taking four years to rally from $40 a barrel to nearly $150, but just five months to drop back again; and a fall of more than 90 per cent in the Baltic Dry Index – a closely watched proxy for global trade – in seven months.

It is easy to forget that it was inflationary fears that stalked financial markets in the first half of the year and that it was only five months ago that the European Central Bank felt it necessary to raise interest rates to 4¼ per cent. At the start of this year, European corporate profits were expected to grow more than 8 per cent in 2008, according to Citigroup research. The latest figures show they will actually have fallen 14 per cent – or 50 per cent in the case of banks and insurers.

Equally, the traditional valuation measures that have served investors so well over decades appear to have themselves lost much of their value. When equities yield more than cash, and then yield more than ten-year government bonds, it is usually time to buy - but shares that looked anomalously cheap in late September, when both signals were flashing, only became cheaper still.

The principal difficulty for investors in 2008 is that there have been no safe havens. In fact, in European terms, Britain has emerged as a relative stronghold – the best place to hold equities next to Luxembourg and Switzerland, whose stock markets have both fallen just over 30 per cent. The benchmark stock indices in the Irish Republic and Greece have fallen more than 60 per cent. Those in a further six countries – Austria, Belgium, Norway, the Netherlands, Finland and Portugal – have lost half their value or more.

Perhaps unsurprisingly, the greatest pain has been felt in the Bric economies – Brazil, Russia, India and China – whose bourses supplied the must-have overseas investments of 2007. Collectively, these markets are down 60 per cent from this year’s peak levels, with Russia down more than 70 per cent. Neither has any single sector proved truly defensive in providing a positive absolute return. At a European level, utilities – commonly regarded as the closest thing to a risk-free asset that a stock market can offer – have fallen 40 per cent this year. Banks and miners have dropped 60 per cent or more. The best place to park cash in 2008 has been healthcare – as witnessed by the 25 per cent gain in AstraZeneca – but as a whole, even that niche has not proved immune: down 16 per cent across Europe.

If there has been one constant in equity markets it is that biggest has been best for the second year in a row: large caps have done markedly better than their smaller peers. The FTSE 100 may have dropped 34 per cent, but the FTSE 250 – which in previous years has been propped up by leveraged buyout activity – is down 42 per cent. Narrow the FTSE 100 down to its dozen or so biggest constituents – what Citigroup terms “mega-caps” – and the trend is even more pronounced. Clearly, the stock market has more faith in companies with the biggest balance sheets to generate profits and pay dividends.

Ironically, the best hope for free market capitalists in 2009 must be that huge government stimulus packages steadily take effect. But there are two other grounds for optimism. First, that with UK professional investors holding record levels of cash, and base rates offering a nugatory 2 per cent return, stock markets that yield 4.6 per cent have become a relatively more attractive bet. Second, that the last time the FTSE all-share fell anywhere near as heavily as it did this year, it rebounded sharply the next year.

But a 1975-style rally would imply a surge in the FTSE 100 to above 10,000. Right now, anywhere near half that level by the end of 2009 will serve just as well.

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