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Investment view

There is a gathering body of evidence to suggest that the US economy bottomed some time towards the middle of the fourth quarter of 2001.

Assuming the figures released last week are not revised in retrospect, this could turn out to be one of the shortest US recessions on record. No wonder Alan Greenspan signalled the end of interest rate cuts.

Yet, despite this, the US market has hardly succeeded in building any momentum. January, usually a good month for stockmarket performance, saw the Dow Jones Industrial Average fall by more than 2 per cent. After two dire years, that is hardly encouraging.

It is true that there is plenty of bad news around just now. The number of corporate collapses which have taken place are reminiscent of worse recessions than that which the US appears to have experienced.

The Enron saga looks as though it could attract considerable collateral damage, even though the circumstances appear quite exceptional. But with Kmart and Global Crossing going belly up, there is some reason for investors to be slow in recovering their poise.

No one has been expecting a quick rebound in the US while concerns remain that a second downward leg in this recession could yet take place.

There will also be lags to this economic cycle – there always are. Unemployment will continue to rise even though conditions may have stopped getting worse. Of course, there are valuation arguments that put a lid on certain sectors of the US market, most notably the technology sector, which is looking as expensive relative to the rest of the market as it did at the height of the new economy boom in March 2000.

While some recovery in demand for both hardware and software might reasonably be expected, there seems no reason to suppose we will return to the rate of growth experienced during the 1990s. Then we had some very exceptional drivers to demand which are unlikely to reappear. The euro is in place and we have 98 years to wait before the next double-digit rollover in computer dates takes place. Anyway, we know what to do now.

The real problem is that investors are uncertain as to what will drive shares forward from this point. This bear market will have brought about an over-reaction on the downside. It always does – just as bull markets travel too far on the upside. We have already bounced by around 10 per cent in the US, so some will take the view that we are probably approaching fair value. For progress to be made from here, we need to know how earnings growth will develop. The way ahead for corporate profits remains as obscure as ever.

Against this background, it was difficult to be anything other than mildly encouraging to the assembly of IFAs who attended the first of the Money Marketing IFA Events conferences last week. More than 200 advisers crowded into Nigel Mansell&#39s golf club a few miles from Exeter and such was the interest in the Investment Question Time session that it was standing room only.

The quality of the questions and level of debate was most encouraging. Investment clients from Devon are clearly well served by their adviser community.

It was rather worrying, though, to find such a degree of unanimity among the panel members. “The crowd is usually wrong” does not always apply but it is a useful maxim. The valuation expansion of the 1980s and 1990s has come to an end. Stock-specific risk has increased. Future equity market returns will depend upon companies&#39 profit growth. Nothing you can argue with there and nothing that helps managers come up with an investment approach that will shoot the lights out.

That there is money sitting on the sidelines waiting to be invested is clear. Only last week, I was phoned by an old friend who had a six-figure sum to put aside for the future. He did not know where to start. Worse, he was suspicious of taking advice although he spoke to me because I was a trusted old friend.

It makes you realise that the public need to be educated much more on financial matters, even if that education simply served to teach people how to recognise good advice when they get it would be a start.


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