From Istanbul to Oslo, the market marches on

Share prices are surging around the world. But will anyone benefit from the booming stock markets other than those who invest in equities?
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The Independent Online
Onwards and up- wards go the world stock markets - what does it mean? The British market hit a new high on Wednesday, with the Financial Times index of the largest 100 companies, the Footsie 100, breaching 4,000. But this is not just a UK phenomenon; it is world-wide. On Wall Street the Dow Jones index is within a whisker of breaking through 6,000 for the first time. Markets in Amsterdam, Brussels, Copenhagen, Dublin, Frankfurt, Istanbul and Oslo all hit new highs this week. Only in Tokyo is the stock market still depressed.

So the boom is not a comment on the Blair/Brown political platform, nor a celebration of the Government's performance. It is not about politics at all - though it has profound political and social implications. It is about economics and perhaps about emotion too.

The markets around the world have become convinced that something has changed. There will doubtless be recessions some time in the future, but for the moment professional investors believe that the world economy is on the threshold of some sort of golden age. Inflation, the great internal threat to the market system, is moribund. Communism, the great external threat, is dead. While in some parts of the world, particularly Continental Europe, unemployment is still a grave concern, in the US it is down to 5 per cent and seems set to stay there.

This confidence about the state of the world economy may not yet be fully reflected in British or Continental European politics but it is very evident in the US. An opinion poll in USA Today on Monday showed that a large majority of Americans believe they are better off than they were four years ago, something that seems to be reinforcing President Clinton's lead in the polls.

The moment that people are convinced that everything is marvellous is usually the moment when things start to go wrong - so perhaps we should be on guard. Share prices at an historic high should carry the same health warning. The professional investment advisers are divided as to whether share prices are "fair value" or grossly over-priced, but hardly anyone is asserting that they are very under-priced. For what it is worth, my own judgement is that prices are indeed too high and that some sort of "adjustment", a weasel word for a fall, will take place by the end of next year. At some stage too, perhaps not for another couple of years, there will be another period of very slow growth, maybe another recession. But the big message carried in the stock market boom is that decent world- wide growth is surely with us.

If this is right, what are the consequences? Think back to the British housing market in the 1960s. Home ownership was climbing but the majority of people did not own their own homes and rented either from private landlords or from the council. The Tories had made it their aim to establish a nation of home-owners and gradually, year by year, the proportion of owner-occupiers climbed. Then came the successive house price booms, which handed wealth to the people who had got on the ladder early, but which also excluded the half of the population who at that stage still rented.

Strong share prices are good news in that they enable companies to raise new capital more cheaply. They are good news in that they reflect a genuine improved performance by company managers. But, like rising house prices, they only bring direct benefit to people who are on the ladder, the "haves". This group of "haves" is larger than most people realise, for it includes not only the small group who own shares directly, but also those who have Peps and investment and unit trusts, plus anyone who has a pension invested in the stock market. But this whole group is only about half the country. It does not, for example, include the many people who keep their savings in a bank or building society and whose pension is not linked to the stock market. These people are like the renters of the 1960s: they face the same danger that they will lose out.

This pension point is important. This week the Labour leadership won the conference vote confirming the present government's policy of linking state pensions to prices and not to earnings. People pay their National Insurance all their lives, yet face the prospect of a pretty mean pension when they retire. They are not paying into a segregated pension fund, building up a stock of investments which rise in value. Instead they will simply rely on taxpayers in 2020 or 2030, or whenever they retire, to pay their pensions. They make a gigantic bet on the politics of a generation or more in the future: the willingness of the yet unborn to pay the tax to support an army of elderly people.

The parallel with housing is not exact but it is close enough to be useful. Politically, investors will become a powerful lobby, just like homeowners. Just as governments of both parties were loath to do anything which damaged the interests of owner-occupiers, so they will increasingly become cautious about doing anything that damages the interests of investors. More than this, they will need to increase the ranks of investors - or at least people whose pensions are invested in the market - to take pressure off the publicly financed pension system.

Socially, just as in housing, there is the danger of a growing chasm between the "haves" and the "have nots", those who share in rising prosperity and those who do not. For the right, the response is clear: encourage the creation of a nation of shareholders, to follow the nation of homeowners; encourage more people to get onto the ladder even if the main beneficiaries are those already on it.

For the left, there is a dilemma: there are enormous economic and fiscal advantages in encouraging people to save and invest those savings in the stock market, for this supplies more money to industry and commerce and relieves pressure on taxpayers present and future. But there will always be some who cannot or will not save, and who find the very idea of investing completely alien. They must be brought directly in.

Indirectly, they already are. For the market in shares serves two masters. There are those who invest, and reap the returns directly. But there are the rest of us, too; who can only prosper by being part of a successful global economy. And today's booming share prices are a celebration of the way the market system has burst out from the industrial world, across China and South-east Asia to parts of India and Latin America. And even, in a rough and ready way, to Russia and parts of Africa. Some day share prices will, of course, fall back; but the system marches on.