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Investment view

I was on holiday in sunnier climes last week. Those of you who feel obliged to exclaim “again?” with a quizzical grin etched on your features should reflect on what a stressful place the investment world has become. Anyway, with the bear market showing no signs yet of having run its course, a little R&R appeared no more than prudent – certainly preferable to explaining to Aunt Agatha why her portfolio is down in value for the third year in succession.

But in these days of mobile phones and instant communication, it seems there is no escape from the inquisitive seeking an explanation as to what is going on. On this occasion, it was the BBC pursuing me up a mountain (yes, another one) to gain the benefit of my wisdom on this protracted market downcycle. No way, Jose, was the easy reply. Yet knowing disarray still remained in the minds of investors made me think back to that severe bear market of 1973/74 to which our current plight is being compared.

Strictly speaking, the bears emerged from the woods in the early summer of 1972. The preceding bull market had, as is usual, overrun its course and profit-taking had been under way for more than a year when the tanks started rolling in the desert and the price of oil shot through the roof. That was October 1973 – a time that few who were present will ever forget.

The similarity to the present is clear but there were far more contrasting events very nearly 30 years ago. Aside from the miners&#39 strike, the three-day week, the secondary banking crisis and the failure of the Conservative Government to hold on to power, the whole structure of the investment and securities industry was different. Rem-ember, this was before privatisations and demutualisations brought millions of new shareholders on to the scene, before, indeed, the Thatcher revolution that promised to consign old-fashioned socialism to history.

We had not yet travelled through our own revolution in the City then. Big Bang was more than a decade away. Securities houses were partnerships and the pain generated by a bear market that saw shares lose more than two-thirds of their value and trading volumes fall off a cliff was borne in no small measure by the men (no women partners then) who owned the brokers and jobbers who facilitated the business of buying and selling shares.

Perhaps the biggest change in structural terms since then has been the way in which ownership of the jobbing function – or market-making as we know it today – has migrated to the banks. The jobbers who made their living from pocketing the difference between the buying and selling price of a share were the merchant princes of the City when I started my career. They were predominantly risk-takers. Not so the banks which perform this service today. No wonder volumes dry and volatility increases whenever uncertainty holds sway.

If this seems a little daunting for the private investor, then why are the institutions not stepping in to undertake some bargain-hunting? This is also likely to be a consequence of the structural changes that have altered for all time the pattern of share ownership and trading. Thirty years ago, the pension funds were only just starting to embark on their share acquisition spree that would take them into prime position as the biggest single owner of UK equities as a group.

The long, barely interrupted bull market of the 1980s and 1990s would lead to their portfolios – and those of insurance companies for that matter – becoming heavily dominated by equity investment. Today, legislative changes, greater transparency and poor market conditions have combined to turn these long-time supporters of the cult of the equity into net sellers. Bargain-hunting for them may not be an option.

Perhaps it is little wonder that US Treasury Secretary Paul O&#39Neill has rounded on the IMF for downplaying the strength of the American economy.

Federal Reserve Governor Alan Greenspan has even hopped across the pond to address our own central bankers. Bear markets are the hurricanes of the financial world. They are costly and life-changing when of major proportions. The collateral damage they cause can take years to repair. No wonder I felt a holiday was the right decision. It is returning this week to these beleaguered financial shores that feels uncomfortable.


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