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Investment View

You cannot turn your back for an instant. there I was, taking a few days well earned rest away from the cold and damp of a British spring, when markets suddenly developed an attack of the jitters. Interest rate worries were the reason. Not here – in the US. And, of course, everyone worked on the assumption that if America sneezes, the rest of us catch pneumonia.

What I found most interesting was the thinness of volumes when the FT-SE 100 took a dive. It seems that real selling was not much in evidence. Indeed, if anything, there were more bargain hunters around when prices dipped than panic sellers. Don&#39t get me wrong. I am still worried about our extended valuation levels, but it does seem remarkable that equities remain so in demand, confounding professional managers. Only now are people beginning to wake up to what is happening.

Professional managers have certainly been slow on the uptake. Figures for pooled pension funds during the first quarter of the current year indicate that the big four are still suffering. These were the managers which took the view early that equities were over valued. It seems they have yet to recover any sparkle. Presumably when funds under management are published next year we will learn that they have again lost ground to smaller firms.

Talking of small, it looks as though a major shift in ownership of the markets may be taking place. There is little doubt that the massive growth of mutual funds in the US has been behind the strength of its market. In the past eight years the amount of money invested in equity mutual funds in the US has multiplied tenfold to around $2500bn. Part is due to the rise in the market, but much more stems from the flow of money into this industry. Ten years ago there were around 1100 mutual funds in America. Today there are 5800. that is more than the number of companies listed on the New York Stock Exchange. I wonder if the same could happen here.

Actually, we are fairly well up with the events. Aside from having a strong pensions market, shares play a much greater part in our savings market than is the case in, say, Continental Europe. Both our own and the US stockmarkets are valued at more than our Gross Domestic Product. Contrast that with Germany where the Bourse is valued at just 28% of the country&#39s economy. In Italy it is barely one fifth of the GDP.

The likelihood is that savings pressure will create a demand for equities. That, at least, is what many of the big investment management institutions are banking upon. No wonder there are many cross-border deals taking place at present. If Hans in Hamburg and Maria in Milan want to make certain they have a decent pension when they retire, they need to start saving now. This does not, of course, guarantee a strong bull market, but it does at least give a little comfort when you start to wonder about the way in which shares have risen so dramatically in value.

I remain cautious though. It is not a one way street and you only have to look at the experience in Japan, the second largest savings market in the world, to realise that personal prudence need not help the economy. In Japan, of course, you receive next to nothing on your bank deposits, so Mrs Watanabe was encouraged to invest in the stockmarket. That did not do her much good either.

Looking at institutional cash holdings, you arrive at the conclusion that there is still plenty of money poised outside the market. True, pension fund and life company liquidity has fallen during the first quarter of this year, but that reflects the rise in the stockmarket rather than any reduction of cash flow or aggressive investing by the UK institutions. They still, remember, make up the bulk of share buyers in this market.

With a further push by the Government to encourage personal savings, and mergers, acquisitions and share buy backs limiting the supply of equities, the outlook looks good. Still, as I have remembered before, in America all these Baby Boomers who are chucking money into their 401Ks will soon wish to draw a pension. Who will be buying equities then?

Brian Tora is Chairman of the Greig Middleton Investment Strategy Committee.


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