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Investment view

Break out the champagne, blow the trumpets, bang the brasses. Interest

rates are cut once more. Happy days are here again. Well, at least they

were last week. A comprehensive bounce in the domestic index restored

verisimilitude to an otherwise bald and unconvincing narrative. Enough of

the G&S allegories. Has the bear market come to an end? Possibly – that is

about as far as I am prepared to go at this stage.

Never underestimate technical influences. Our chief portfolio strategist, Mike Lenhoff, maintains a chart that is so big we do not have a wall wide enough to

display it in full.

It is the “overbought/oversold” indicator much loved of portfolio

strategists. He assures me it is, if not infallible, one of the best guides

to short-term market moves around although I have thus far failed to

back-test it. But he did say that the UK market was looking seriously

oversold two weeks ago. The UK market has since bounced. The good news is

that he still believes domestic shares remain in oversold territory. On one

matter I will agree with him wholeheartedly – it is not just fundamentals

that move markets. Technical influences, institutional cashflow, pure

sentiment all combine to determine the way in which our wealth wilts or

rockets. The fundamentals, it has to be said, have not been that bad.

True, the nation&#39s purchasing managers are a tad cautious – not as

pessimistic as those in the US but none too confident that the UK will

shrug off an American-led slowdown. But companies are delivering profits

that look, with a few notable exceptions, no worse than we were


Indeed, there is just the inciest bit of summer cheer around at present.

Lombard Street Research, well known for preaching doom and gloom, regales

me with the belief that we look to be heading for above-trend growth in

2002. It seems there is nothing new under the sun. Gordon Brown failed to

eliminate boom/bust cycles. Hopefully, we may be close to ending our

anticipation of the bottom of the bust part. This is clearly not what the

Bank of England&#39s monetary policy committee believes. The fact that it has

cut interest rates during the same week that the Nationwide Building

Society remarked upon unsustainable house price inflation must be an

indication that it is more worried about slowing global economic activity

than it is over the cost of the average home.

As it happens, the fall in interest rates has had a marked effect on the

affordability of housing in this country. The cost of buying a house now on

average absorbs less of our income than was the case in the 1970s, even

though the likely cost will be a higher multiple of salary than we had to

bear then. But house prices can fall, as we discovered so painfully in the

early 1990s. Then there were heavy technical influences that drove prices

up – and just as swiftly down.

So, we have to decide whether this latest rally – which admittedly has

taken place on the back of very low trading values – is a further stage in

the consolidation of the stockmarket as we approach the end of the bear

market or simply a technical bounce before we resume a downward trend. I do

not wish to prejudge the verdict of my colleagues on the asset allocation

committee but I am encouraged that the news flow is generally supportive of

current market levels while there is a growing body of opinion that

suggests the global economy will pick up to trend growth or even a little

better during 2002.

That is sufficiently close to take comfort, given that markets anticipate

events. It would not surprise me in the least if we were enjoying more

robust stockmarket conditions just when companies are reporting reduced

profits. It has happened before and in the world of investment there is

seldom much that is truly new.


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