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Investment view

There is an old joke about a man who enters a pet shop to buy a parrot and is shown three specimens – two sleek, well turned out birds and the third a scruffy, moth-eaten specimen. On enquiring the price, he discovers the scruffy bird costs more than the other two put together. Seeking an explanation, the pet shop owner confesses he does not know but remarks that the other two call it “chairman”.

The word chairman was writ large in my diary last week. Aside from the day job (and as it happens, our asset allocation committee did not meet last week), I chaired the meeting of our local residents&#39 association in London and the annual parish meeting for the village in Suffolk which I consider to be my true home. I chaired investment question time panel at IFA Events in London for the first time. Now, that was an experience.

Dave Harris has rather made this event his own but with golfing commitments as extensive as his, it is inevitable that some conferences will be denied his presence. This was to be the first of several panel sessions where I was to be his doppelganger, so I looked forward to the occasion with a mixture of nervousness and high expectation. The initial signs were good. It was standing-room only in the Chalon room of the Hammersmith Novotel Hotel.

There was one seminal moment when the panel session drew to a close. An IFA accosted me, congratulating me on the readability of these columns. Do not tell me, I said, tell the editor. But the sting, as ever, was in the tail. What he had extracted from these weekly musings was an increasing sense of confusion on my part as to what the future may hold for investors. Perhaps I do wear my heart on my sleeve but I had to agree that seldom in my four decades of involvement in this industry have I been so uncertain as to what the future holds.

On the face of it, the debate is simple. Markets operate in cycles, with peaks and troughs extending beyond the ability of valuation criteria to justify the levels attained. If true, then we should presently be in that trough period that occurs ahead of the resumption of a bull market. The counter argument reads that, for whatever reason, the game has changed and the historically expensive nature of equities, most notably in the US, will restrain markets for an indefinite period.

The term, “for whatever reason” is important because there are a number of plausible explanations for such a scenario. Accounting practices are no longer trusted following Enron. An ageing population within the richer, developed countries will place an intolerable strain upon capital markets as investment funds built up in the past are withdrawn to finance retirement expenditure; the growing transparency delivered by the internet has removed pricing power from companies, resulting in squeezed margins and much greater volatility in the fortunes of individual businesses. Take your pick. There are plenty more besides.

Now for the controversial conclusion. These difficult conditions create more opportunity than threat. It is true that a period of valuation expansion appears to have come to an end but then lower inflation and lower interest rates make a difference only within the context of the timeframe within which they change. It is hard to imagine price/earnings multiples rising still further if short-term rates have settled at around double an inflation level of sub-2.5 per cent. You are then left with just the return that the growth in economic activity, in productivity and ultimately in profitability can deliver. This creates a stockpickers&#39 paradise but one where torpedoes are ever present. Confused? Yes, I am. Despondent? Never.


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