View more on these topics

Investment view

October. Month of mists and mellow fruitfulness. And if it is October, it must be time to head to the West Country again. Sadly, my Port Isaac retreat had gone the way of all flesh but I consoled myself with a trip to Rick Stein&#39s Seafood Restaurant. Excellent food but prices more Pimlico than Padstow. Given the state of the market, it is a wonder I could afford it.

It was the state of the market that I was tackling when I met with independent financial advisers in a variety of locations down in the South-west. A remarkably sanguine bunch they all were although there was evidence that the damage wrought by this bear market is significant.

One insurance company representative admitted that, while he had some trouble meeting his targets, provided he concentrated on corporate bond and property funds with the odd with-profits thrown in, things were not too bad. But pure equity investment was simply not in demand. No wonder the market is in such disarray.

It is worth touching briefly upon the message delivered to those good advisers in Devon and Cornwall. The theme was “When would the bear market end?” The answer was that I do not know.

But some aspects have become clearer as this bear market progresses. The valuation expansion we saw in the 1990s, justified on the basis that low interest rates and low inflation demanded a higher price for equities, was clearly false. In the end, low inflation will limit profit and dividend growth, so any premium accorded to equities is likely to be less rather than more.

The belief, too, that technology as a sector was unaffected by economic cycles has also proved ill founded. Technology turns out to be just as vulnerable as any supply side industry. Indeed, this situation is probably worse, given that significant overcapacity was built up in that long bull market. No wonder CMG and Logica are getting together, a marriage borne more out of weakness than strength.

But the problem remains that it is difficult to judge the right price for equities. A healthy share market is crucial as free and transparent capital markets are essential ingredients in the capitalist mix. In the end, the risks that equity investment entails must carry with it the promise of greater returns than those achievable from more predictable markets, such as Government debt.

However, some established theories are being turned on their head. The reverse yield gap, as an example, has collapsed. The yield on gilts is just one and a quarter times that on equities. Given that the recent average has been two times or so, this suggests that equities look very cheap compared with bonds. But look back further and you will find that the reverse yield gap was once a yield gap – with equities yielding more than bonds to reflect the greater risk they carried.

While the ability of well-managed companies to increase dividends should demand some yield discount for equities, the thought of us returning to a situation where equities yielded half or less than the yield on gilts no longer looks sustainable.

Last week remained difficult for investors and managers alike. There was little in the way of good news although the prospect of a bid battle for Abbey National will have brightened the day for traders. Perhaps the real change is that, for many, the direction of the market no longer matters so much. The fact that it is moving at all is sufficient.

Indeed, volatility has been increased by the activity of those now prepared to short the market, either through derivatives or using spread betting. Investment may never be quite so straightforward again.

Among the week&#39s entertaining reading (which did not include market reports) was an article on the wisdom of one Harry Browne, a “leading investment adviser” in the US with 30 years experience and 11 books under his belt.

I beat him on years of service but fall way short on book publication. Among his tips are that nobody can consistently time the market. Yet that is what clients all too often expect. Investing, he says, is accepting the market return. I will go along with that but trying to judge what that return is likely to be is proving difficult.

Still, if timing is such a problem, perhaps equity investors should fall back on pound/cost averaging. Thank heavens I did not cancel my savings plan.

Recommended

Willetts or won&#39t it?

While IDS struggles to dispell his “old school” image, his party are pitching plans to encourage people to be more conservative with their money and start saving.Hot on the heels of Theresa May&#39s leopard-print shoes at the Tory party conference came Shadow Work and Pensions Secretary David Willetts. He unveiled the Conservative&#39s new strategy for […]

FSA mortgage and general insurance regulation both set for Oct 2004

Following the adoption of the Insurance Mediation Directive by the European Parliament, Financial Secretary to the Treasury Ruth Kelly today confirmed that the regulation of mortgages and general insurance will come into force from October 2004. Kelly says: “I am happy to confirm that both mortgages and general insurance regulation will come into force simultaneously. […]

Handed fame on a pate

While celeb spotting over lunch in a Soho restaurant with an MM reporter, Bristol & West PR Debbie Stavely got very excited when she recognised a well-known media man.When B&W head of marketing Dom Toller pointed to a small, slightly balding man leaving the restaurant with an exclamation of: “Oh, look who it is…,” Stavely […]

Scottish Mutual makes investing Ea5y

Scottish Mutual has established the Ea5y income bond, a guaranteed equity bond that offers a choice of two income options or a growth option.The name of the product is a play on the word easy using the number five because it has a five-year term. It offers investors a choice of annual income at 6.25 […]

Thumbnail

Employer iPMI responsibilities could continue to escalate, says Jelf

New laws in Dubai will put the burden of providing international private medical insurance (iPMI) firmly on the shoulders of the employer in order to maintain the country’s leading healthcare facilities. With 10,000 UK nationals having moved to the country since 2007 and only 16.5 per cent of the total 8.2 million people living there being Emiratis, Jelf Employee Benefits believes this move was inevitable and employer responsibilities could continue to escalate in future.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com