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Investment view

Over the years the argument for investing in the stockmarket has been that equity investment provides the best long-term returns, providing you can weather the vicissitudes of a market that could deliver the odd heart-arresting moment. This was particularly poignant after the bear market of 1987. Arguably the shortest on record, even professional investors believed Armageddon lay just around the corner. A colleague remembers a partner at Cazenove remarking it had been fun while it lasted. He then retired to clear the trees from his country estate. The trees are growing back. The market returned to reward long-term investors much more swiftly.

Private investors were shaken by the events of October 1987. It was a shock to realise that wealth could dissipate so swiftly. The effects of the more recent bear market are less dramatic but no less devastating to those believing positive returns on equities are a God-given right. Persuading investors the long-term game has not changed will not be easy.

Back in the aftermath of Black Monday I adopted, for presentational purposes, a chart that showed the growth of income on shares over a long period. Despite down years for the index, dividend income went on rising. With ordinary shares you could expect income to grow steadily. And a higher dividend return must inevitably push up capital value, even if there are fluctuations as markets wax and wane.

It was discomforting to read that as many as 40 of the FTSE 100 leading companies may have to reduce their dividends during the coming year. Already, ICI, Reuters, Royal & Sun Alliance and CGNU have made significant reductions in pay-outs to shareholders. If you cannot rely on dividend income rising to support equities, what can you rely on?

There is no doubt that dividend income has become less important. The action of the Chancellor in ending the ability to reclaim tax on equity dividends sent shivers through the pensions industry. It was a clever move. Harry Morgan, head of private clients at Edinburgh Fund Managers, admitted to predicting a swift setback in the stockmarket when this news was announced. Shares actually rose. Few realised this was a massive closet tax increase. Along with the poor markets that have persisted for more than two years, it has served as an additional nail in the coffin of final salary schemes.

Overall, I am inclined to the view that the pessimists are too harsh in predicting a wholesale decline in dividends from ordinary shares. HSBC actually upped its pay-out this month, despite reporting lower profits. Dividend income is alive and well, even if companies are now seeking alternative means of returning value to shareholders, such as share buy-backs.

The Barclays Capital Equity/Gilt Study suggests that the average level of dividend rises has fallen back to close to the rate which obtained in the years immediately following the Second World War. Perhaps in a low interest rate, low inflation environment this should be expected. Indeed, there are consensus figures suggesting 2002 will be a better year for dividends, with the rate of increase doubling to 6 per cent.

Meantime, house prices continue to race ahead and will clearly inhibit the Bank of England from cutting interest rates. More worrying is the suggestion that people may be relying on house price inflation to do their saving for them. Certainly, in the US, the buoyant stockmarket conditions of the late 1990s served to discourage other forms of saving. But the writing is on the wall. Final salary schemes are on their last gasp and saving for retirement is now everyone&#39s priority if you do not want to work beyond three score years and ten. Advisers have a duty to persuade the British public that it is in their own best interest to put aside for the future what they can afford today. We will all benefit in consequence.


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