COMMENT: Why PDFM is right to leave the bull party early
Tuesday 17 September 1996
By following the party-pooper's approach, you miss out on the bonanza element of the upswing, but if you intend to be around for the long term, you're going to have a much better time of it. Hardly anyone gets their timing spot on more than once. Which is why the approach being adopted by Phillips & Drew Fund Management is so interesting. Some months ago it advised clients to go liquid; more than 15 per cent of its non-property funds are now in cash. This may not sound like much, but for pension fund money it is pretty much unprecedented. As the FT-SE 100 share index soars to within spitting distance of the 4,000 mark, PDFM stands accused of getting its timing fundamentally wrong.
Time will tell, but it seems more than possible that the last laugh will belong to Tony Dye, PDFM's astute head of investment. Investment strategy is run mainly on a valuation basis round at PDFM, and Mr Dye took the view some while back that valuations, here and more particularly on Wall Street, had become dangerously high. Every instinct tells you that he is right, that what we are witnessing is the last throws of the bull market. The question is not whether it is going to fall but when and how much further it's got to rise before it does. To support the bull case for equities, you have to believe the economy has changed fundamentally for the better, here and in the US. In other words, you have to believe that growth will continue to outstrip inflation into the indefinite future. Furthermore, you have to believe that corporate profits will continue the trend of recent years of taking an ever larger share of any wealth created. While these trends might continue for a couple more years hence, it requires a tremendous leap of faith to think they'll persist any long than that. The job of the market is to anticipate the future. PDFM is doing the right thing in leaving early.
Crossed lines on rail sell-off
Before he embarked, misguidely as it transpires, on his return trip to merchant banking, John MacGregor gave the nation rail privatisation. The bank he quit politics to rejoin, Hill Samuel, is now defunct in all but name, a once great banking dynasty reduced to a brass plate somewhere inside Lloyds-TSB.
The world of private railways, meanwhile, steams on. But the Government's original intention of creating a new competitive railway by breaking BR into a thousand tiny pieces is looking more clapped out by the day. The disclosure that the Japanese bank Nomura is looking around for a train operating company to add to its existing rolling stock leasing business, Angel Train Contracts, is as clear an illustration as you could get of the way the industry is consolidating, even before the process of dismantling it has been completed.
Mr MacGregor and his advisers around at the Department of Transport always assumed that the privatisation of BR would be followed by the eventual emergence of a handful of large and powerful groups operating more than one Train Operating Company (TOC).
What they had not reckoned on is the sort of vertical integration we are now witnessing with Nomura's plan to get into the business of running trains as well as leasing them. This is not a dastardly or exclusively Japanese plot to colonise the railways. Brian Souter's Stagecoach got there first by picking up two passenger franchises, serving notice that it planned to bid for the remaining 12, and then swooping to buy one of the other rolling stock companies, Porterbrook Leasing.
The idea behind these vertically integrated railway groups is clear - to furnish their rolling stock businesses with captive markets when their fixed term contracts with the TOCs begin to expire. The Japanese have watched Mr Souter wriggle free from more OFT and MMC investigations than most of us have had British Rail breakfasts and are working on the assumption that his Stagecoach-Porterbrook deal will also escape the clutches of the competition authorities.
If rail privatisation is to have any credibility then it is important that Mr MacGregor's successors in government prove the Japanese wrong.
George keeps his eye on EMU Target
Of all the arguments about monetary union to have hit the headlines recently, the row over the Target clearing system for the new currency is the most obscure. In a nutshell, if we do not join monetary union, our banks may find themselves the victims of discrimination.
French and Germans banks have been urging their governments to deny British banks full participation in Target so as to help them grab market share from London. Eddie George, Governor of the Bank of England, thinks it a shabby tactic, but at the same time he does't believe it will have much impact even if it succeeds, because there are so many alternative ways of clearing the new euros. After all, Britain has long been the dominant offshore centre for dollars, without access to the Federal Reserve.
But let's accept it does disadvantage London a bit. Those who worry about the City's standing if Britain stays out should take heart from another area of the financial system, where London has the whip hand over its Continental rivals. This is the question of whether the European Central Bank will use reserve requirements as a tool of monetary control, as envisaged in its statutes.
The idea is that banks are made to deposit funds with the central bank at below market rates, as a way of curbing the money supply without raising interest rates. The Bank of England strongly dissapproves of this approach, for not only is it less effective than interest rates, it also amounts to a tax on banks. Germany has found that its use of reserve requirements has simply driven Deutschmark banking business to freewheeling Luxembourg.
If the European Central Bank attempts to use reserve requirements to control the Euro, and Britain stays out of EMU, there would almost certainly be a huge and lucrative flight of banking business to London. The City should be praying that the advocates of reserve requirements come out on top at the ECB.
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