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Eastern promise

Has anyone heard Japan and Korea mentioned lately?

No, not the World Cup. I mean the change in the performance of those two countries&#39 stockmarkets.

A few commentators, almost as bruised and battered by their financial experiences, are looking to Japan for non-footballing glories – signs that a global investment recovery may be close.

I cannot imagine that there is a single adviser reading this who has not at some time in 2002 had an awkward review meeting or an embarrassing phone conversation with a client on the subject of investment returns since March 2000. I suspect the vast majority are reeling from what has been a brutal two years in investment terms.

Where are we now? Despite the clamouring of technical and fundamental analysts for an upward breakout, the FTSE 100 has remained stubbornly range-bound since last summer. In the US, the Dow Jones (only 30 stocks) has been more volatile at times but equally frustrating.

The reasons are well known and historic but they may provide some evidence as to when our investment clients may start smiling again.

The near-vertical growth of the markets during the 90s created a confidence and bull habit that needed the madness of the dotcoms to purge it. The rich made money, invested frequently and got richer while the poor did nothing and it showed.

When a small internet company in the States demonstrated growth that was frankly miraculous, a bubble began that was to grow like no other for a generation. It just kept inflating and the doubting cynics, few in number, were picked off one at a time until, by February 2000, 19 out of every 20 analysts had Vodafone, Bookham, Marconi, Baltimore and the rest as “strong buys”.

Lone defenders, such as Neil Woodford at Perpetual, stood in fear for their jobs as the whole market became a frenzy of buying that drove prices beyond ridiculous valuations and into fantasy.

Everyone was sucked in – the media, the employees,the markets, IFAs and, of course, their clients.

Then something happened. Like the small boy laughing at the naked emperor, some financial pundits began to ask why a company with the turnover of a corner shop was valued by market capitalisation at much more than WH Smith? The company was lastminute. com and the flotation made every financial headline. It was what the bubble needed – the party was over.

Yet such bull markets never die easily. No, this market died the death of a thousand cuts as the huge volume of retail investors, day traders and heavily geared psychotics desperately tried to breathe down the dying beasts nostrils for signs of life – all to no avail.

Inevitably the Nasdaq index slid, at the pace of a decent ski run in Austria, from 5,000 to 1,500 and the FTSE from 6,999 to 5,000. Then came September 11 and we all thought about jobs as burger flippers.

The legacy was a level of volatility that has had every analyst reaching for an economics textbook. Blue-chip shares move 8 per cent in a day for no apparent reason. Panic and over-reaction dominate. And the rest, as they say, is history.

Where does all this leave you in your next review? Well, here is a thought.

About a month ago, 19 out of 20 analysts had Vodafone as a “sell” as it plunged to 95p at one point. Shares in Book-ham, Marconi, Baltimore Technologies and the other darlings of 1999 these days give change from a pound (quite a lot of change in some cases). Nosebleed valuations are a thing of the past, and fundamentals like “profit” are back in vogue. Even those wonderful EBITDA figures are scrutinised a little more closely (Earnings before Interest, Tax, Depreciation and Amortisation).

For many investors, one more really bad year may very well signal capitulation and then, my friends, the markets will probably take off again.

I look at the returns from Baring Korea and wish I had seen them coming. I wait expectantly for the Japanese Nikkei to break through that magic 12,000 level (remember when it was nearly 40,000?) Perhaps this darkest hour really will herald the dawn. May we all be bathed in sunshine this June and facing East.


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