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I am concluding this series of articles, updating an overview of the major investment asset classes, by summarising the relationship between the current and expected behaviour of equities against the main alternatives.

In my last article, I suggested that equities remain very attractive on fundamental mathematical grounds, with price/earnings ratios, dividend yields and profit growth able to support further upward movements.

Further, in previous articles, I have noted and discussed the fact that equity prices, in particular, as represented by the FTSE 100 index, have been trading in an increasingly narrow range, between around 5,700 and 6,000.

When this happens, certain investment theories (most notably chartism) suggest that any break-out above or below that level will lead to a major shift, one way or another, in share prices.

Thus, if the index had fallen below the lower end of the trading range – often called a support level – for even just a few days, prices could tumble into almost a freefall.

Conversely if the index broke above the higher end of the range, that is, 6,000 as represented by that major FTSE index, and often known as a resistance level – the market could soar much higher.

I have for some months believed and argued my reasoning, as in my last article, that the break-out of equity prices from this trading range would be upward and I am delighted to note that, within the few days before writing this article, that has indeed happened.

The FTSE 100 has been regularly testing the 6,000 resistance level until the bears – the people who are more inclined to disinvest from equities at a particular price level – finally succumbed. The index promptly rose above 6,100 and chartism suggests that it is not going to stop rising until at least, perhaps, 6,400 in the short term.

Chartism, for the uninitiated, suggests and attempts to describe the selling or buying behaviour of investors influenced by factors other than mathematical fundamentals.

Let me attempt to explain the main aspect of chartism by citing the recent price history of a particular share – British Land – and then I will expand the discussion to equity prices generally before bringing all this into focus by explaining how this could be extremely useful in portfolio planning with other investment asset classes.

British Land plc, one of my continuing long term favourite shares, as it happens, trades in commercial property, although, for the most part, makes its continuing profit by buying property and securing long-term tenants rather than selling the property at a profit.

The consistency of its profit growth has been admirable, making its fundamental attractions as an investment very obvious. The share price has risen significantly over the years to around 8 12 months or so ago.

It was noticeable around that time that whenever the share price rose to 8 it retreated slightly as a significant numbers of investors took at least some of their profits and sold the share. This price of 8 became a resistance level, even though the company’s fundamentals continued to improve.

When the price broke above this resistance level, Chartism theory suggested, correctly in this instance, that the price could and would rise quickly. This has happened.

The old resistance level then became a new support level as potential investors watching British Land’s share price realised that any fall towards 8 represented an ideal buying opportunity.

The share price then progressed quite quickly towards 14 and tested that level a few times though always retreating as, Chartism theory would explain, investors took profits pending a further upwards break-out of the share price or, depending on market conditions generally and mathematical fundamentals of this company in particular, in fear of a complete reversal.

In recent months, British Land’s share price became supported at around 13.30 but continued to meet resistance at 14. A few days before writing this article, the share price broke through the 14 resistance level and stayed there. This indicates, again according to Chartism theory, that a further significant and sustainable price rise might be on the cards, especially as the company’s fundamentals remain very strong.

Where is all this theory leading? As with British Land’s potential now looking much higher than 14, so the FTSE 100’s potential is looking much higher than 6,100 (6,400 appears predictable, even by the end of the year).

Not just theory, of course, as I noted in my last article company profitability and dividends are continuing to increase and p/e ratios provide significant support to share prices at these levels. Moreover, and arguably most significantly, share prices are currently supported by the reduced or reducing attractions of alternative investment asset classes.

As I have noted over my last few articles, money market (deposit) rates offer only a shade over 5 per cent, government bond redemption yields are no better, with typical investment-grade corporate bond yields at 6 per cent or thereabouts.

Commercial property – the darling of all asset classes in recent years – appears to be losing its shine a little, if not becoming downright vulnerable.

Thus investors have, at present, few obvious choices but to continue to favour equities with dividend yields at around 3 per cent, covered at least 2.5 times by earnings.

Here are my near-term predictions for the various asset classes based entirely on a (potentially very dangerous, of course) combination of chartism theory and technical fundamentals.

Deposit rates are deposit rates, with little room to speculate about the future other than the conclusions from the Bank of England’s monthly meetings. There does not seem to be any great likelihood of a significant movement here, so an annual return of 5 per cent seems reasonable.

Government bonds offer little or no better value. Prices of these bonds cannot go higher unless market interest rates fall and, as I have just mentioned, this does not seem likely, so 5 per cent a year seems a sensible projection here also.

The Financial Times and other information sources indicate investment-grade corporate bonds returning no more than 6 per cent.

The Investment Property Databank index remains encouraging for the commercial property market in the short term at least but, with falling rental yields and speculative property values, it would be foolhardy to believe that total returns from this asset class will continue to match those in previous years.

If investors do not want to favour equities, then where are they going to put their money? Why accept annual returns of only 5 per cent when dividend yields alone are more than half this figure?

There is the additional risk of equity investing but I would quite confidently and very humbly suggest that all the indications are that equities have tremendous potential for short and longerterm progress.

Portfolio planning, based on asset-allocation principles, suggest or even dictate that other asset classes should feature in almost every investor’s strategy but it is surely difficult to look far beyond increased exposure to equities for most clients.

In closing, and purely for a little bit of longer-term fun in my articles (because I, in common with most readers, am not authorised to give these recommendations to clients), dare I put on record a little portfolio of shares to watch. Purely as a result of all this theory, of course, and I know that I am hereby giving myself enough rope with which to hang myself. Let us watch the shares noted below, eh?THE POPPLEWELL PORTFOLIO

Price, October 11, 2006

British Land 14.05

BSkyB 5.51

Vodafone 1.30

Glaxo 14.68

Royal Bank

of Scotland 18.90

Redrow 6.22


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