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Safety thirst

Speaking to a TV presenter in a studio last Friday, I was reassured

to find that his attitude to the conflict in Iraq is much the same as

mine – that we could not possibly know for certain what the outcome

of this conflict would mean for markets. As a consequence, I intend tomake

this column, as far as possible, a war-free zone for the next few

weeks.

This will, I know, be difficult to accomplish. Last Thursday saw me

at Celtic Manor for one of the IFA Events roadshows. On this

occasion, I was part of the investment panel, rather than chairing

the discussion but it happened that the first shots in the Iraqi war

had been fired earlier that morning.

I was reminded of the occasion just 18 months earlier, when I was

addressing a life and pensions group just outside London. The date

was September 12. My train was delayed so I arrived late. Those

present were convinced that my tardy arrival was due to the need to

revise what I had to say in the light of the terrorist attacks.

Similarly, in Wales, all of us on the panel felt the influence that

the conflict would have on markets would be uppermost in the minds of

questioners. We were not entirely right.

Yes, we were asked about the war but one IFA, quite correctly in my

view, made reference to the fact that investment advisers were

sheltering behind the Iraqi situation, blaming it for the poor

performance of the stockmarket. The reality was that it had played

little part in what was happening to bond and share values.

As with Glasgow, the week previously, I was impressed with the

interest shown over investment matters and in the quality of the

questions put to the panel. The level of understanding of why markets

behave as they do demonstrates how professional the adviser community

has become over recent years. Yet, it was clear that the IFAs present

– and the investment professionals on the panel for that matter –

felt unloved by the Government. Indeed, it was generally believed

that the Government had done much to undermine the savings and

investment industry, almost certainly to its own long-term detriment.

I have sympathy with the audience. Their clients had suffered through

this long bear market and were understandably wary of investing

almost anywhere. I very much wanted to give them the comfort that the

market would improve. Indeed, in some measure it already had. The

day before the Glasgow roadshow the previous week, the market had

crashed through 3,300 on the FTSE 100 index and doom and gloom

abounded as the audience addressed the panel. By the time the panel

reconvened for a Welsh audience, the market had rebounded by some 15

per cent from the lows of the previous week. Yet, the future for

equities remains clouded.

It is not just because of the war – not even because of the war, for

that matter. Shares on both sides of the Atlantic do not look

particularly cheap. They are no longer outrageously expensive, as

they became at the start of the new millennium, but you have not had

the collapse in valuation levels that took place in, for example, the

tail end of the 1973/74 bear market.

In part, this is because corporate earnings themselves have fallen,

meaning that there is less profit to be distributed among

shareholders. Then there remains evidence of surplus capacity,

particularly in the US. While the seeds of a further market slide may

not necessarily be present, it is hard to see shares making much

progress once any relief rally that should accompany the end of

hostilities has taken place.

My crystal ball feels particularly clouded at present. We have

inflation ticking up in this country, yet no evid-ence of upward

pressure on prices in the private sector.We have household wealth

diminishing because of the fall in the stockmarket but consumers are

generally holding up relatively well, even if retail sales are

slowing. We have an economy buoyed by expenditure in the public

sector, but a Government that is becoming constrained by insufficient

tax revenues and higher borrowing requirements. Little wonder it is

hard to reach a positive conclusion at present, whether or not the

war is concluded swiftly.

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