Last week, it was the central bankers holding central stage. Interest rate policy came under the limelight. Quite what the odds are of all three leading central banks announcing their decisions during the same week is unclear but it gave the City something to bet on. Few will have succeeded in getting the treble right.
The smart money was on a dramatic gesture from the Fed. The smart money was right. Fifty basis points came off what was already an historically low level. It goes to show just how concerned Alan Greenspan is at the apparent fading form for the US economy. It also underscores that there really is not a lot more the Fed can do to ease monetary policy.
Over here, of course, money may not be historically cheap by developed world standards but most consumers find it a steal. Perhaps that is why the Bank of England decided against a cut, leaving rates on hold for a full year. It was a decision that wrongfooted the gamblers, many of whom were convinced that where the Fed led, the BoE would follow. Perhaps having housing at its most expensive in relation to income proved too big a hurdle for the MPC to leap.
There were no surprises, on the other hand, in the European Central Bank holding the catch-all rate lower. Doubtless, the Germans would have loved to see a downward move but some areas of the EU need a tougher approach from the centre. One size does not fit all, so do not be surprised if the UK decides this is a club that it really does not want to join. At its worst, it looks as though the ECB could be stifling economic recovery. No wonder the stability pact looks in tatters.
Meanwhile, the flight from equity funds in the US continues. Figures released last week disclosed an outflow of $20bn from equity mutual funds during October. This is way below the $50bn that was withdrawn in July but it nevertheless creates a landmark as it is the fifth month in succession that there have been net outflows. Never since these figures were first published some 12 years ago, has such a consistent withdrawal from the market taken place.
We are seeing a similar attitude developing over here, with sales of Isas struggling. Perhaps, as a consequence, the Stock Exchange's decision to launch covered warrants will prove to be the epitome of perfect timing. After all, covered warrants allow investors to short the market. This is becoming an increasingly popular pastime for those investors who have not abandoned the equity market entirely. It does nothing to reduce volatility.
Herein lies the rub. What is needed to bring the retail buyer back into the market? On both sides of the Atlantic, savers and investors are becoming increasingly disenchanted with equities. While the debate as to whether fair value has yet been achieved continues to rage between the professionals, the retail market is drying up. Trading volumes among private investors currently stand at less than 40 per cent of that achieved back in the dying days of the old millennium.
In some measure, the withdrawal of the retail customer from the equity market has been overshadowed by the more publicly trumpeted problems surrounding pension funds and insurance companies. Yet we need a healthy demand from the Sids of this world if a sustained recovery is to be achieved. Greater volatility and stock-specific risk are frightening many of the army of shareholders – reckoned to be more than 12 million strong – away. How can confidence be restored?
As I sped my way between Scottish financial centres last week (Edinburgh – brilliant sunshine, Glasgow – pouring rain), I took comfort from the fact that not all advisers were telling their clients to eschew equities and look elsewhere. True, there were some bandwagon travellers – recommending hedge funds and property for their clients – but the more considered were endeavouring to establish a strategy for investors that did not count out ordinary shares. They know that, long-term, equities should deliver.
Nevertheless, the feeling is growing on me that private investor portfolios will need to look different in the years ahead. The other side of the low inflation coin is that company profits will not be flattered by a rising cost of living,so returns may be more modest. Bonds may play a bigger part in future but equities will still be there.