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Boon or bust?

It is official, we are in the grip of only the second double-dip recession since the early 1970s. I remember only too well the dire conditions that existed back then. They were exceptional but, arguably, the conditions that brought us to this difficult economic state are hardly likely to arise on a regular basis.

Of course, we may find that this initial pass at what constitutes economic performance is revised later and that a true recession has actually been avoided. A drop of 0.2 per cent is, after all, not a great amount and Government figures are often revised.

Last week, we also had Government borrowing numbers for March that were higher than expected but we still hit our target for the year as the February figures were revised down at the same time.

There is a tendency to take our economic temperature too often. Every statistic is pored over and forecasts revised or trimmed while commentators like me endeavour to extrapolate what it all might mean. M&G’s Richard Woolnough summed it up in a presentation I was fortunate enough to attend recently – whatever happens to GDP, people are unlikely to die as a consequence.

In the meantime, I am more concerned what the consequences will be for the domestic equity market due to the anaemic state of our economy. The answer seems to be not a great deal, given the overseas exposure of so many of the bigger companies that make up the bulk of our stockmarket capitalisation.

That said, nervousness continues, itself an understandable consequence of the uncertainty engendered by indifferent economic news. At about 5,700, the level at which our own benchmark FTSE 100 stood towards the end of last week – we are still way below the levels reached earlier last year, which, in turn, are not as great as the 2007 peak, which fell short of the all-time high of nearly 7,000 reached at the end of 1999. Equity investment has repaid few favours recently.

Only last month there was an article in the Investment Management Review, published by the Chartered Institute for Securities & Investment, which suggested that the future of quoted equities was under threat. It seems that demand for equities is shrinking. A report from the McKinsey Global Institute predicted the share of equities in global financial assets will fall from 28 per cent in 2010 to 22 per cent in a decade.

Part of the reason is an ageing population in the developed world cashing in stock positions to fund their retirement but it is also based on the fact that Asian savers tend to prefer bonds and cash deposits to shares. All in all, it signals a potential major shift in investment emphasis in what is a relatively short timeframe.

The report also points to shortcomings in the efficiency of equity markets to deliver fundraising solutions for companies, particularly at the mid to small- cap end of the spectrum.

Actually, I am not sure this is as negative a piece of news as it was made out to be. We already know that buy-and-hold strategies no longer work in quite the same way, given the growing professionalism of the investment community, faster communications and increased volatility.

A restricted supply of equities can only enhance the position of superior stockpickers. It also goes some way to explaining why bond managers, such as Richard Woolnough, are in such demand and manage so much money.

Brian Tora is an associate with Investment Managers JM Finn & Co

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