HAVE WE HIT THE BOTTOM?

WHEN the Labour Party swept back to power in May 1997, hopes were running high. In the words of the song adopted by the party for its campaign, we were promised: "Things can only get better". But for Britain's army of 11 million stock market investors, things have not got better.

They have got substantially worse. Share prices in London have fallen three years in row for the first time since 1939-41. After hitting a record high of 6950.6 at the tail end 1999, the FTSE 100 index touched a low of 3609.9 in September, a fall of 48%. There is a real fear that 2003 may see a continuation of the slide.

The value of investment portfolios has shrunk dramatically. Many investors are still nursing losses from the internet boom.

Endowment mortgages are now likely to fall short of their repayment targets and pension plans are demanding a big increase contributions.

The Government must shoulder some of the blame for the market slide.

Chancellor Gordon Brown scrapped dividend credits for pension fund operators in his first year, grabbing an estimated pounds 5 billion a year. His reluctance to reduce, or even scrap, stamp duty has deterred investors.

But the derailing of the US economy is what really hurt. The profits of blue-chip companies, already weighed down by crippling debts, have been hard hit. Corporate disasters have included Enron and Tyco in the US and Marconi and Equitable Life over here.

The City has paid a heavy price with the big banks shedding an estimated 20,000 staff since the start of this year.

So have we seen the bottom of this bear market? When will things start to improve?

What signs do I look for? These are just some of the questions I am asked by private investors on a regular basis. The truth is no one can say for certain. There are just too many issues clouding the picture and it does not always follow that share prices will bounce with the same momentum with which they fell in the first place. Even the experts are split.

Chris Phillips, chief executive of Royal London Asset Management which manages 21 billion, is more optimistic about the long-term outlook for investors than he was few months ago.

"There are signs the worst may be over.

Hedge funds appear to have stopped selling the market short, largely because some of the bigger houses have ended the practice of stock lending.

The change of rules relating to life assurers also means they do not have to sell into a falling market in order to maintain their solvency levels."

That said, investors are not rushing to buy. They are still moving out of equities and into fixed-interest investments, even though the bond market looks expensive.

Many of them had their fingers burnt during the technology boom.

"Anyone who thinks the rally will be as steep as the falls of recent years is just kidding themselves. We will not see the returns enjoyed in the past.

Gains in future will be restricted to between 5% and 6% a year," adds Phillips.

He reckons the turning point in the market's fortunes came towards the tail-end of September, when the market struck a low after being battered by a spate of bad corporate news.

Not everyone is so upbeat about prospects.

Peter Meinertzhagen is chairman of stockbroker Hoare Govett and has worked in the City for 38 years. "I don't think we have seen the bottom yet. It might be there will be a major event triggering another sell-off." His advice to punters is to look for companies offering sound dividends. "Look for companies yielding 4% and still growing. It is better than holding cash in the bank."

Meinertzhagen says the sectors to look at are those upon which we remain heavily reliant, such as booze, tobacco, food and pharmaceuticals. They still generate plenty of cash. Last quarter, drugs giant Glaxo-SmithKline was reckoned to have attracted pounds 400 million in cash through the front door.

Now compare the views of Meinertzhagen and Phillips with probably the best known market-maker in the City of London. Brian Winterflood runs the company that bears 'When Labour swept to power in 1997, hopes were running high - in the words of the song Things Can Only Get Better. But for Britain's 11 million stock market investors, they have got much worse' Now and then: London's benchmark stocks index is lower than when Tony Blair and wife Cherie first celebrated victory at the polls FTSE100 2/5/97 4455.6 FTSE100 30/10/02 4002.7

his name and says he can make money in bull and bear markets.

"As a market-maker, I don't have to give advice and have no clients to answer to.

Long-term views on the market usually last up until lunchtime," he says with a twinkle in his eye.

Market-making is share trading in its purest form. The market- maker acts a kind of wholesaler, supplying the rest of the market with the liquidity it needs. It can be a hairy business, but Winterflood has been around long enough to know the pitfalls.

He reckons the Footsie will continue to trade in a range of 3500 to 4000 for some Chris Phillips:"worst may be over but any rally would only be a steady one"

time and will adjust his stock positions accordingly. "I'm relieved that it has has not been another Armageddon, but we still look top-heavy economically. The indices are misleading us. The ratings of companies on Wall Street are still far too high."

Winterflood says some of the big institutions are hell-bent on getting the market to look better. But he maintains this bear market is likely to be a long one and remains more bearish than most.

The advice from another fund manager summed it up for anyone thinking of investing in these difficult times: "Always chase the aces and go for value."

AFTER Wall Street collapsed in 1929, it took at least another five years for share values to recoup the losses. For many investors that was too long.

The economy took even longer to recover and it was not until the start of Second Word War that America found itself back on an even keel.

The biggest drop in share values, and perhaps the most widely documented, came in October 1987. In just one day, the FTSE 100 tumbled 251 points, losing 12% of its value. What many people may not realise, is the Footsie still ended 1987 higher than it started.

Outside factors and a series of one-off coincidences governed that fall.

The London market was effectively shut down the Friday before the collapse by the Great Storm that ripped across the south of England.

That night, the Dow fell an unprecedented 100 points, sparking the subsequent global collapse in shares the next Monday. Meanwhile, traders in London were still getting to grips with a new computerised trading system and that contributed heavily to the huge price gyrations seen.

A NEW-FOUND optimism is creeping into conversations at watering holes around the City.

However, traders and fund managers are horrified by the prospect of another year of share losses in 2003. One thing is for sure - it will be another hard 12 months for the market.

Share values in the US are still too high. The Dow must fall further, or the dollar weaken, or the American economy stage a strong recovery.

The Dow at these levels is overvalued. We may be close to the bottom of this market, but the recovery will be slow and laborious. City investors should brace themselves for further volatility and that is likely to continue well into the first half of next year.

Low inflation and falling interest rates may be good news, but they will work against us when trying to stimulate economic growth.

The days of big returns from the stock market are a thing of the past.

Some bluechip companies continue to offer better returns than leaving your money in the bank, but it is too early to talk of recovery.

I remain an oldfashioned bear at heart.

The markets' darkest days THE VERDICT

Copyright 2002
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