Beware black October

Autumn could well be better for shares than spring and summer have been, but the tenth month can be a choppy in stockmarket terms.
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The Independent Online

Among the more interesting, if bizarre, tasks I perform is that of a financial agony aunt on radio. This week I was asked what makes shares go up and down? Good question. Answering it sensibly is not so easy.

Among the more interesting, if bizarre, tasks I perform is that of a financial agony aunt on radio. This week I was asked what makes shares go up and down? Good question. Answering it sensibly is not so easy.

The slick answer in the world of share dealers is "more buyers than sellers", if you are talking about a rising share price, and the reverse when falling. But this statement hardly plumbs the depths of what really drives a share price.

Fear and greed are often cited as motivating forces, but the dynamics of share price movement are very complex. Much has to do with how well the company is performing and how performance stacks up against expectations.

August is a busy month for companies reporting their figures. The cornucopia of corporate statistics falls largely on deaf ears. Fund managers are in Palermo or Padstow, while the dealers have taken off to Torquay and Torremolinos. Markets are thin and often this means prices gently decline. There is usually natural selling pressure on shares when the big institutions are not there to spend their cash flow. And if they are on holiday, they are hardly likely to be reacting to the news that is around.

We are now well into the 2000 interim reporting season and it is looking rather encouraging. The index may be continuing to drift downwards, but most companies are reporting profits ahead of analyst's expectations. The banks, in particular, seem to have done better than people expected, despite increasing competition and the slowing economy.

Other companies, such as pharmaceutical giants Glaxo, AstroZeneca and SmithKline Beecham, along with the world's second largest tobacco business - British American Tobacco - have also done well, although in the case of BAT, eyes will be firmly focused on the likely outcome of the appeal against a massive damages award in America.

Private investors should be encouraged by this trend. Our experience is similar to the US, which is even further advanced in the reporting season, and the figures, if anything, are even better. Rising profits help lower market valuations. Much recent worry over share price levels has to do with high ratings. If profits continue to rise, then valuation levels become less demanding.

Quite when this more encouraging scenario will prompt the institutions to buy is another matter, but I would not be surprised to see a better autumn for shares than we have had this spring and summer. This is often the case, although, for reasons far from clear to me, October can be a choppy month in stockmarket terms. This is the month when Black Monday in 1987 took place. The great stockmarket crash of 1929 was also an October event.

While you are busy working out your buying programmes to get in ahead of those fund managers who even now might be heading for the airport, I thought I would return to last week's comments, and in particular, the application of attribution analysis in portfolio measurement.

Fund managers - and private investors for that matter - working to a benchmark can build some fairly simple models to show if the investment strategy is going according to plan. The simplest form of attribution analysis will compare the performance of the benchmark index with that of your own portfolio.

More complex benchmarks can be broken down into their constituent parts. For example, the APCIMS private investor indices are made up of the FT/S&P world indices, so you can look at how all the various bits of the index are performing individually. If you decide to build a portfolio that accentuates those areas you believe will do better, again you can look at the performance of the relevant indices and determine whether you made the right decision. Try it. You may be surprised at what you learn about your own investment management skills.

Brian Tora is Chairman of the Greig Middleton Asset Allocation Committee

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