What would you like in your Christmas stocking next week? A common wish for those involved in the investment business is a copy of the Financial Times a year hence.
The theory is that the information imparted would be sufficient to deliver a profitable year’s investing. But it might contain information we would rather not receive and, anyway, it would take all the fun out of managing money.
While conditions could be right next year for a reversal of fortunes, the weakness of the dollar seems certain to hold back many of the constituent companies of the FTSE 100, simply through the translation effect on profits. Good news comes from the fact that 2004 was not a runaway year. After the bounce delivered in 2003, there could have been every reason to expect markets to continue to run. Economic growth was strong for much of the year and corporate profitability rebuilt swiftly. By and large, companies are awash with cash, much of which is being returned to shareholders in the form of dividends or through merger and acquisition activity. Indeed, the growth of private equity and continued rationalisation throughout a number of industries looks like restricting the supply of shares across the market. This is not a new phenomenon. It happened in the late 1990s and look what happened to share values then. It is not just companies leaving the stockmarket because they are disillusioned with the rating accorded them. Private equity is also heading off companies, such as Saga, that might otherwise have sought a flotation. In 2004, private equity was very much a growth story. Much of the demand for private equity funds can be attributed to the same mentality that has driven hedge funds. As it happened, this part of the investment world did not have a particularly sparkling 2004. It was inevitable, I suppose, that just when everyone wants to leap aboard the bandwagon, momentum runs out. Yet there is every chance that hedge funds will come of age and find a cornerstone in many investors’ portfolios. We approach the end of the year with confidence continuing to build but nervousness still apparent. There have been surprisingly few alarums and excursions over the past year. Yet the fact that Isas have been deserted shows that the anticipated premium return of equities is not considered sufficient to tempt investors back. Let us hope the year to come encourages and supports the cornerstone of the free market – the equity investor.