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Investment view

Is this the final capitulation? It seems that American investors are now throwing in the towel in vast numbers. According to a report published at the end of last week, some $47bn was pulled out of mutual funds in the US.

If accurate, that would be the biggest amount of money ever withdrawn in a single month, even though it would not be the greatest percentage of the value of the industry overall that investors had dumped. June was not good either but the $18bn that was taken out of mutual funds pales into insignificance compared with the July figure. The word panic springs to mind.

We are, of course, talking about equity mutual funds. It seems that bonds funds remain in demand while, rather interestingly, money is also flowing into ethical investments. Socially responsible investing appears to be still acceptable in these difficult times, even if there seems little doubt that American investors are becoming increasingly disenchanted with a stockmarket that is continuing to erode value.

Contrast the performance of shares with that of the property market, which is booming in the US and is not behaving in a half bad fashion here either. The year-on-year rise in the value of UK houses to the end of July comes out at more than 20 per cent, according to both Halifax and Nationwide. This is the fastest rate of increase since the boom times of 1989, which then were driven by impending changes in the tax treatment of mortgages.

This time around, it seems that people are putting their faith into bricks and mortar where they once bought shares. Unfortunately, a fair bit of this faith is backed with borrowed money, leading to fears as to what might happen if the property market turns sour.

We are certainly getting plenty of statistics and surveys that should give a clue as to why it is that stock markets have been so sour. UK manufacturing industry appears to be turning down, bringing to an end a recovery that had lasted for a full six months. Manufacturing data from the US also showed the recovery there to be stalling.

We may not be heading back into a recession but we are certainly not making much progress. That may not be enough to justify selling at current levels but it hardly encourages the buyers.

Some of the data is actually encouraging, though. The slowing in the growth of consumer credit no doubt helped the Bank of England reach its conclusion that interest rates should be left unchanged this month. Our own chief economist has revised his views that the next move in interest rates will almost certainly be up. He still thinks that, on balance, that is the most likely outcome but the chance of a cut from this level has undoubtedly increased.

Meantime, the banking sector has been adding to the woes of the market by reporting profits that have tended towards the low end of expectations as they raise their provisions for bad debts.

The importance of what is happening in the banking sector should not be underestimated. Aside from being the biggest group of companies in the FTSE 100, it accounts for nearly one-fifth of the value of shares in European markets overall. Moreover, many banks own insurance companies, so fears that they might have to shovel money into these subsidiaries to shore up their capital adequacy are also emerging. Lloyds TSB remarked that there was no question of this being necessary unless the FTSE 100 fell below 3,500. In markets like these, that is something that could even have happened by the time you read this article.

The trouble with a single sector having a disproportionate effect upon the behaviour of the market is that it can hold back the performance of the headline index. In the end, this is what investors will be watching to see if they should be piling back in.

It is worth remembering that January and February 2000 were boom times for mutual fund sales in the US. Funds were selling well here, too, as investors watched the value of technology stocks soar. It is ironic to think that a good performance from the bank sector might be needed to tempt investors back in over here. This is not currently looking likely so be prepared for a dull summer – marketwise, that is.

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