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Investment View: Wombling free?

No sooner had I suggested that Japan might be worthy of re-examination as a country in which to invest, than prime minister Koizumi called a general election. Typical. The uncertainty created demands a wait and see policy, at least for the time being.

The issue which led to this action was the privatisation of the Japanese post office – or rather the fact that the bill enabling the privatisation to take place was defeated. The post office is a sensitive issue among the establishment. Aside from anything else, the savings it handles for the Japanese public add up to mind-blowing sums. Even so, Koizumi put great store by having his plans accepted and now he is going to the country to try to achieve the endorsement he seeks. More on Japan anon, no doubt.

Meanwhile, back at home, the FTSE 100 index continues to win back ground and last week notched up a four-year high. We are back at levels not seen since before 9/11. Of course, the soaring price of oil is having an influence and results from the mining majors demonstrate how demand for raw materials from the Far East is helping boost prices and profits.

What was so impressive about last week’s performance was that, on Wednesday, ex-dividend price adjustments should have lopped 14 points off the index, yet the market achieved a near 14-point rise. The underlying strength is quite remarkable.

One possible explanation is what has been referred to as the de-equitisation of the market. A combination of share buybacks and corporate activity, along with a dearth of sizeable new issues and a growing tendency to use debt to finance expansion or acquisitions, is reducing the supply of equity. With low interest rates, this is perhaps not surprising but it unbalances the relationship between supply and demand.

This has happened before. The late 1990s saw the numbers of shares in issue decline, again because of share buybacks and M&A activity. The consequences were a further impetus for the technology-fuelled bull market that ended so disastrously. Even then, what happened was far from new.

In the early days of my career, I worked for a firm which specialised in fixed-interest securities. It was also a time when furry creatures, believed to live on Wimbledon Common, achieved a remarkable degree of popularity. The City is not slow to latch on to popular fashion and adopted an acronym that described how to react to a positive cashflow from investing institutions.

The Womble theory – weight of money, buy long end – was the way the boys in the gilt market rationalised their approach to discovering that insurance companies and pension funds had a surplus of cash coming in. For a while it appeared to work but soon the massive hike in inflation and soaring interest rates meant all previous bets were off.

Weight of money is a popular means of accounting for positive market moves which may lack fundamental support. As it happens, there is a growing belief that an improving valuation picture will provide additional justification for buying shares. As the results season draws to a close, earnings are clearly improving. It may not be just a declining supply of shares supporting the market.

But cashflows ebb and flow. We must consider what may happen in future. Will a whole new generation of retiring baby-boomers be positive or negative for shares? With all the recent news concerning the underfunding of major occupational pensions, perhaps the weight of money argument could prevail for a little while yet.


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