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Investment view

There has been another interesting side-effect of the fall in sterling against the euro. France is on the verge of overtaking the UK to become the world&#39s fourth-biggest economy. The weakness of the euro propelled Britain into fourth place behind the US, Japan and Germany in the mid-1990s. Before that, it had been slipping down the league tables, with even Italy enjoying a bigger GDP than us at one stage. The prosperous 1990s changed all that. Sadly, it may prove only temporary.

Given the number of people I know who have upped sticks and travelled across the Channel to make their home in France, I am surprised this position was not reached earlier. Not that I can see it making a lot of difference. It will not be too long before Russia, India and China assume greater economic status – something that is inevitable by virtue of their population. More important, it appears to confirm that the period of sustained growth in the UK may be coming to an end.

Last week&#39s consumer confidence figures certainly suggested that we are not spending our way out of the slowdown. This is not necessarily a bad thing. The level of consumer debt is as worrying as is the fact that the economy is becoming more reliant on public expenditure. Consumer confidence now stands at its lowest level since October 1998. We may not watch these figures as closely as they do in America but it provides a clue as to what could drive the monetary policy committee&#39s thinking. More rate cuts could indeed be on the cards.

The other significant event of last week was the publication of the 2003 Barclays equity gilt study. It confirms what we already knew. British Government stocks produced the best real return during 2002 at 6.7 per cent. Equities, in contrast, fell by 24.5 per cent to deliver three negative years in a row. Looking at the 10-year figures, corporate bonds lead the way, providing an annualised real return of 8.6 per cent. Gilt-edged stocks delivered 7.2 per cent and even index-linked gilts, at 3.4 per cent, only trailed equities (3.9 per cent) marginally over this period.

Over 20 years, of course, the picture looks rather different. An annualised return of 8.2 per cent for equities compares with 6.6 per cent from gilts, 3.5 per cent from index-linked stock and 4.6 per cent from cash. There is no doubt that the sheer scale of the market setback last year influenced these figures. This study goes back to 1899 and 2002 was the fourth worst year during this 103-year period of analysis.

It happened that I used the example of the index composition in 1899 last week when talking to Sofa members and internal trainees, demonstrating the dynamism of the market. At no time was this more evident than in 2000 when 10 per cent of the FTSE 100 index stocks changed. All those that entered were in telecoms, media and technology. It was the legacy industries of brewing, utilities, aggregates and plumbers&#39 merchants that were swept aside. Back in 1899, the list of the UK&#39s biggest companies was dominated by mining stocks. There were plenty of banks too, but no stores, no drugs companies and no service industries.

Indices can be useful. They are a snapshot in time as to what drives an economy. Of one thing we can be certain. The leading companies of today are unlikely to be those in the vanguard 50 years hence. There may be some familiar names but the composition of any index is likely to look very different. Even so, if the experience of the past 103 years is anything to go by, there will still be plenty of banks around.

Banks, as it happens, were in the vanguard of the reporting season. The experience for them – and for insurance companies – has been mixed, although insurers have been more uniform in the sorry tale they have to tell. The fall in equities took its toll. With valuation levels now looking undemanding, three unprecedented down years in a row for the equity market and a reverse yield gap that has virtually disappeared, is there a buying case for equities? I wish I could confirm there was.

The reality is that portfolios should be more diversified in an era when inflation remains low. Those 20-year figures from the Barclays&#39 study may confirm equities as the asset class of choice but they do not support an equity-only policy. The next decade will be interesting for investors – especially insurance companies.

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