Comment: These claims really are too good to be true

'What's all this talk about counter-parties? This is supposed to be a PEP isn't it? You know - the things invented by Nigel Lawson to encourage direct investment in the stock market'

Never use the term "guaranteed return", is the rule of thumb traditionally applied by those selling investment products, for investment and guarantees are two things that very rarely mix. There's a whole new generation of PEPs now being marketed, however, which comes pretty close to breaking this old taboo, so much so that they are generally referred to in the press and the trade as "money back guaranteed bonds". It is perhaps unfair to pick on the HSBC PEP Plus to demonstrate the perils of these products, for it is just one of many and it actually holds out the prospect of a better return than a good few of its competitors. But we have the prospectus so here goes.

The HSBC PEP Plus is an offshore investment trust which promises to grow your money over five years in line with the FT-SE 100 share index. In addition it promises a 33 per cent bonus on top. In the event that the market falls, you get your money back. Sounds almost too good to be true, doesn't it, and indeed it is. According to the marketing material the product will "outperform any rise in the the FT-SE 100 Index" and will offer "100 per cent return of capital after five years". In the unlikely event of the FT-SE 100 index falling over five years "investors will receive a full return of their capital - not 95 per cent, or 90 per cent, but 100 per cent".

This is about as close as you ever get to a guarantee in investment products, but lamentably it is not what it seems. The small print of the prospectus has a section on "investment risks". There is a possibility of a counter- party defaulting, it tells us, in which case "no guarantee is given express or implied that shareholders will receive back the amount of their investment in shares". Oh dear.

But hold on a mo. What's all this talk about counter-parties? This is supposed to be a PEP isn't it? You know - the things invented by Nigel Lawson to encourage direct investment in the stock market? Isn't counter- party risk all to do with derivatives? Well yes. This PEP actually puts your money into a mixture of zero coupon bonds, CDs, FT-SE 100 call options etc, etc. Only don't talk about it too much or the Inland Revenue and others (ie an incoming Labour government) might see it as the final straw and use it as an excuse for cracking down on the PEP industry as a whole.

One final thing. In most circumstances, you would actually be better off putting your money into a conventional tracker fund than this "guaranteed PEP". This is because the HSBC PEP Plus offers you only the capital growth on the Footsie plus 33 per cent, not the total return including dividends. A rough back of the envelope calculation reveals that as a result, the market would have to rise by more than 70 per cent over five years to beat a conventional tracker, or fall by more than 25 per cent.

Both these things are possible, but if history is anything to go by they are highly unlikely. Needless to say, the prospectus doesn't mention this. But then if you pointed these things out, you might never sell a PEP.

Government is still at BA's bidding

It's an odd thing about British Airways, but it has always regarded the Government as a 100 per cent owned subsidiary at its beck and call. Privatisation and the onset of a limited amount of competition in the skies has failed to shake the airline in its belief that its own interests and those of the British people are one and the same thing.

To some extent this is an understandable thing, for in the airline business the term "national flag carrier" continues to mean something; landing rights are still jealously guarded national properties, carved up on a bilateral basis between national airlines. All the same, at a time when ministers and British Airways alike pay lip service to the idea of free competition and open skies, you would have thought it might have occurred to them that these days they might not always be batting on the same side. But no. The Department of Transport continues to trumpet the interests of British Airways as if Virgin, British Midlands and others never existed.

This is nowhere more apparent than in negotiations now taking place to allow British Airways to set up a code sharing arrangement with American Airlines. The US won't grant anti-trust immunity for the deal unless the Brits allow open access to British airports for American carriers. So get on to it, British Airways orders the Department of Transport. Suddenly, the objections traditionally held by the DoT to an open skies policy with the US melt away, there's a flurry of activity and Sir Colin Marshall's poodles in government are jetting over to Washington to hammer out an accord.

So desperate is the DoT to do BA's bidding that it is now prepared to consider setting up an "Offair" to protect the interests of other airlines on the transatlantic routes, an initiative always resisted in the past. It would seem that the DoT is prepared to offer almost anything to get this monstrous new monopoly up and running. We exaggerate the position, of course, but there is something mighty suspect going on here. Normally even the tiniest airline deals are referred by the DoT to the Civil Aviation Authority for analysis. Not, apparently, in this case. It can only be presumed that the DoT thinks the outcome potentially too embarrassing to risk.

Keeping the dollar high will be tough

The dollar has finally cut loose from its lengthy association with the adjective "weak". It climbed above the symbolic 110 level yesterday, consigning last year's lows around 80 to the dustbin of history.

The three main currencies, dollar, yen and German mark, are now round about where their governments want them. The ''orderly reversal" of the US currency's nosedive against the other two that G7 ministers called for in April 1995 has been accomplished. Japanese and German exporters are no longer in the extreme pain they were but US exporters have not yet started complaining about the dollar's rise.

The problem is going to be sustaining this pattern. If the dollar strengthens further ahead of the US election in November, there will be a real danger of trade tensions. If it falls again, the tentative recoveries in Germany and Japan will be set back. The chances of keeping the key exchange rates roughly where they are now will depend partly on expected movements in interest rates. These look as though they will support the dollar at above Y110. The US economy is gathering steam while the recoveries in Germany and Japan continue to look fragile. The odds are that German and Japanese rates will remain low until the autumn and probably longer. On the other hand, the Federal Reserve will raise US rates, election or not, if the strength of the American economy shows any sign of triggering wage pressures.

Keeping currencies at the right level is an even more nerve-wracking business than moving them away from the wrong one. Getting the dollar up from its lows was the easy bit. Keeping it where it is will be the real test of exchange rate management.