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Investment view

Suddenly there is an autumnal feel to the weather. Nights are drawing in and no longer is it possible to make an early start for the office in daylight. This was brought home to me in no uncertain terms as I left for the BBC&#39s White City studios to review the financial papers for BBC Radio Five&#39s Wake Up To Money.

It was dark when I left home and dark when I arrived. It was not particularly light when I left Guy and Mickey for the office at 6am. Roll on next spring.

The period from now until the days start lengthening will be crucial for the health of stockmarkets. First we need to get through September and October. October has the reputation for being the difficult month, with the Wall Street crash and 1987&#39s stockmarket collapse both taking place in this month. But September can prove tricky as well. As the third quarter draws to a close, managers will be adjusting their portfolio weightings and I dare say there will be a frisson of nervousness as the second anniversary of 2001&#39s terrorist attacks approaches.

At least the newsflow continues to encourage. At the end of last week, we saw the official estimate of US economic output revised upwards. In the second quarter, gross domestic product figures had already come in ahead of expectations but the US Commerce Department has increased its estimate of growth from 2.4 per cent to 3.1 per cent on an annualised basis. Even more important, business spending activity appears to be rising as well.

It is business investment that is most sought after on the other side of the Atlantic. Alan Greenspan knows that cheap money tends to encourage consumer indebtedness (even if he wants the consumer to keep on spending) whereas it is companies which need to start spending money if the economic recovery is to be sustained. If they are now becoming more confident in their spending plans, it augurs well for the full-year results of companies reporting early in 2004.

But there is one area which continues to exercise investment advisers&#39 minds – the provision of income. Aside from reports that a number of income unit trusts may fail to qualify for remaining in the equity income sector because of dividend cuts, it is hard to find reliable income from other sources at much above derisory levels.

With bank deposit rates at their lowest point for nearly half a century and British Government securities still offering yields at the bottom end of a 30-year range, the hunt for income is proving testing and is likely to achieve increasing focus in the months ahead.

The relationship between the yields on bonds and equities has always proved important. Equities used to yield more than bonds to reflect their riskier nature. This yield gap reversed in the 1950s as pension fund money switched into equities to take advantage of a future stream of rising dividends, hence the term reverse yield gap to describe the difference between the yields on gilt-edged stocks and ordinary shares. During the high inflation period of the mid-1970s, this reverse yield gap achieved dramatic levels.

As inflation fell, gilt yields started to come down, taking the reverse yield gap with them, even though the return on equities was declining as the stockmarket drove higher in the 1990s. The most dramatic recent moment came in early March when the yield gap returned, with equities yielding more income than UK sovereign debt. For many, this was the turning point for the equity market. Since then, we have also seen yields on longer-dated gilt-edged securities rise although they remain low in relative terms.

Even though rising dividends no longer look as certain as in the past, the argument remains that equities should provide higher income returns over the long term. This was an element of investment that was comprehensively forgotten in the technology boom. Many of these firms had no profits from which to distribute dividends but the prospect of capital appreciation was enough to sustain demand for their shares.

Today, people are returning to fundamentals and looking at what income a share might be able to provide in the future. If companies can increase their profits and thus their dividends, this would support a bull market. Dividends are certainly back on the corporate agenda. Even Microsoft has commenced paying a dividend. Watch dividend announcements this autumn. They might cheer those longer nights.

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