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Investment view

I do not know what it is about October that makes it such a difficult month for the stockmarket. The Arab/Israeli conflict in 1973, which ushered in the worst bear market in my experience, took place in October. The great stockmarket crash of 1987, exacerbated in the UK by the closure of the stockmarket on the preceding Friday thanks to the hurricane that swept through Southern England, began on October 19. And of course, there was the Wall Street crash of 1929.

So far this October we have got away fairly lightly, although some days have had a distinctly autumnal feel to the market. Given the news at present, this is hardly surprising. RollsRoyce has announced massive job cuts and, although the results season in the US is not proving universally downbeat, there seems little doubt that recessionary times are present on the other side of the pond. One amazing aspect of the postSeptember 11 world remains the patriotic urge of British consumers to get out there and spend.

One major problem at present is the lack of earnings&#39visibility. Analysts are finding forecasting particularly arduous. There is also the ever-present volatility of current markets. The speed at which businesses react to uncertainty these days has hit certain industries very hard indeed. You only have to look at the performance of individual companies in the FTSE100 to realise the way in which investors have been deserting certain sectors and supporting others. Marks & Spencer has been one of the best-performing shares in the UK market so far this year while companies like Pearson and United Business Media have halved in value.

Defensive sectors have done well out of current uncertainty. The flight to quality not only benefited bonds. Pharmaceuticals, tobacco, food retailing, utilities – all have outperformed over recent weeks. There is little value to be found in these sectors just now. At some stage it will be right to move into cyclical stocks but nobody is yet prepared to lay a bet on when economic activity will start to turn up.

All this makes life very difficult for asset allocators and portfolio planners. On the one hand, there appears to be considerable value around in some companies and sectors. On the other, the market punishes poor judgement very harshly, so getting it right is particularly important. You only have to look at how some once great companies have been humbled to realise that the stockmarket is very much a market of stocks these days. Sadly, even the best of investment managers lack 20:20 foresight but two measures that can give comfort in difficult times are yield and asset value. That is not to say you can ignore earnings but when it is as difficult as it is at present to be sure how profits are likely to pan out, the support from a solid dividend yield and the belief that a strong balance sheet exists can be most reassuring.

There are certainly some high yields around. Among the shares in our current list of buys are well known names offering 7 per cent plus returns with every likelihood that the dividend will be maintained. Compare that with the 5 per cent or so available on sovereign debt and even less on cash. Yields were rather ignored in the heady days at the end of 1999 and beginning of 2000, when the new economy boom was at its peak. Suddenly they are fashionable again.

Once upon a time it was high-yield unit trusts that knocked everything else into a cocked hat performance-wise. I well remember M&G advertising its dividend fund in the wake of the 1987 bear market, pointing out that £1,000 invested 25 years previously would be producing income of more than £1,500. The message was not to worry about capital performance – it is investment income that is of most importance. Perhaps income funds are about to have their day again.


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ICMG – Sub Prime

Friday, 26 October 2001.Fixed term: Until March 31, 2003.Fixed rate: Loans up to 70 per cent of valuation – 6.75 per cent, 71 percent and above – 7.25 per cent.Minimum loan: £25,001.Maximum loan: Up to 95 per cent of valuation subject to a maximumof £1m.Income multiples: 3.5 times principal income plus second or threetimes joint.Arrangement […]

Premier Fund Managers – Premier x-cel Portfolio

Tuesday, October 23, 2001.Aim: Income and growth by investing in UK and overseas equities,unit trusts and investment trusts. Minimum investment: £150,000.Investment split: Choice of UK and overseas equities, unittrusts and investment trusts.Income facility: Monthly, quarterly, half-yearly, annually.Charges: Annual 0.75-1.25 per cent.Commission: Initial up to 3 per cent, renewal 0.5 per cent.Tel: 01483 306090.


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