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This
is BFL's 6th formal Market Report since January 2001. But
there are only so many ways in which to express disappointment
whilst remaining optimistic for the future of 'Equities'.
So for this report we will leave much of the data out and
instead rue the unpredictability of it all.
We only
need one example to set the scene. In January 2002 we reported:
Many
city forecasters are expecting the FTSE 100 index to be between
5,750 and 6,200 by the end of 2002. That is a 10% to 18% rise.
It actually fell to around 3,750!
Our hands
are up. It has never been more obvious that (October 2002):
No-one knows what will happen in the future. So why
do we cling on to the belief that it will all be worth it
in the end? How reliable is it to look back and see that it
has always come good in the end?
The historic
yield on LloydsTSB shares is currently 9% - this compares
with a normal Building Society Account rate of around 3.75%.
In the past some would have considered this to be a strong
buy signal for Equities and a sell signal for Gilts (which
currently yield less than shares). The reason this can be
so is that the analysts are not confident that the corporate
world can maintain dividend payments. On the other hand, if
they can, or if dividends fall only marginally, then the prospects
for shares are good.
But what
about the extraordinary underfunding for the Final Salary
pension schemes we hear about? Can companies maintain Dividends
if their pension reserves have been badly depleted? If they
can't and if consumers are spending less because maybe they
are worried about their job, their house is worth less and
they feel bad about world security - values could continue
down in a spiral of cause and effect. If Dividends can be
maintained and confidence increases, suddenly there is a clear
blue sky.
In our
earlier paper entitled 'Blind Faith' we looked at the 25 year
view:
A
gimme in Financial Advice seems to be that Equity (or Stockmarket)
investments are the best bet for the long term. There is good
reason for this, in December 1974 the FTSE AllShare Index
stood at 61, in November 2001 it was around 2,500.
•
£100 invested in the stockmarket in 1974 could now
be worth £4,000 and on top there could
have been (say) a 2.5% yield (dividends) each
year.
• £100 invested in the building society could
now be worth £300 if none of the income
was spent.
But
should we have blind faith? Clearly the answer is no.
Today
the All Share currently stands near 1,750 so the £4,000
value referred to above would now be reduced to approximately
£2,800.
Having
seen negative aggregate growth over 5 years (very unusual),
commentators are now resorting to reviewing 10 year and 20
year periods for signs of comfort. And indeed they are comforted.
But this
is all very well. How relevant is the past hundred years to
2003? Things have changed a bit haven't they? One of those
things will be the dynamics of how the economy works. Perhaps
one of the biggest changes is the shift of power from business
to consumer. We all now operate in such a heavily regulated
world that old school economics may not apply. Good for those
consumers that don't rely on Equity values, bad for those
who do.
Of course,
we could keep debating on the one hand but on the other…..
Eventually we go round in circles.
One thing
is clear, no Investment Adviser can confidently predict the
future, but hopefully one thing we can do is help a reasonable
consideration of the present.
A very
well known and respected (BlytheTax client) Fund Manager in
a February 2003 newsletter says: 'I would argue that the
deep falls in share prices and the current uncertainty are
the very reasons one should consider investing'. Notice
'consider' - he chooses his words well! No-one would
argue with the fact that Equity investment should be considered.
The BFL
reports have always hinted at, or overtly referred to, risk.
This is the heart of the matter. There is no great value in
looking back at decisions that weren't taken about a future
that no-one knew would happen. Instead we need to take stock
of where we are now, recognise that the Stock Market and Equities
underpin much of our society, and judge whether the risk we
are taking or considering is suitable to our circumstances.
Risk
is a very personal matter - one that you need to address personally
and keep under review. If you are unsure, please see the Risk
page on the News & Comment page of our Website, or contact
us for a copy.
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