How to answer a ferocious bear

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What should one say to the investor who argues this? Though British equities, and especially gilts, might offer reasonable value at the moment, the cyclical bear market is less than six months old. Since cyclical bear markets generally last a minimum of 18 months, this one is likely to last another year. Accordingly, whatever value it offers now will be bettered in a few months' time.

There are two alternative one- paragraph responses. The first points to the ferocity of the bear market, which has seen gilts lose one-third of their value since the peak. The scale of the slide means that the whole of the cyclical bear market has been compressed into six months and, while it would be unreasonable to expect much of a rise in bond prices for some months, a sideways movement is more likely until the fundamentals again favour bonds.

The second says things really are different this time, and there is no serious threat of renewed inflation. There will be a small cyclical upkick, nothing more. The sharp sell-off is itself the reason why things are different, for usually monetary policy is tightened too slowly at this stage of the cycle. This time the bond markets have themselves tightened policy by falling so far and now present a buying opportunity.

Since the timing of markets is always uncertain, if either of those responses is satisfying one could justify buying gilts now on the grounds that it is better to get in too early and have to wait rather than wait too long and miss the market altogether.

But, of course, most investors are in no mood to be be satisfied by anything like that. Many of the professional advisers have little credibility, as they were still advising that gilts were fair value six months ago. So at a time like this it is worth turning to one of the few voices that warned of the dangers to see whether it has turned bullish yet - the voice of the editors of The Bank Credit Analyst and its sister international publication in Montreal.

For people unfamiliar with their work, the BCA editors have tracked international money and interest rate movements for many years, drawing buy-sell investment conclusions from their analysis. Because they are publishers - they do not themselves act as an investment bank or stockbroker - they have no particular interest in telling people to buy securities to generate business. They can dare to be bears and can turn bullish when the rest of the market is sunk in gloom. Have they yet? No - but they are beginning to argue that the worst may soon be over in some markets at least.

For a start, they believe that US and Australian bonds are cheap. Not only are they oversold because of the speed of the fall in prices, but they offer good value by historical standards.

That does not, however, mean that a new boom is in sight. That will have to wait until the US economy slows.

European bonds, including British gilts, are also oversold but unlike their counterparts in North America, do not in general offer such good value. German and Japanese markets are the riskiest but, while risks in Britain are much lower, value is only average. (The most recent BCA analysis argued that gilts were only fair value, but the market has since fallen, so prices may have moved into the 'inexpensive' zone.)

As for equities, the BCA team argues that prospects are mixed. Overall they are neutral, but the position varies greatly from market to market. The most vulnerable are Germany and Switzerland. US prospects are mixed, with some further falls in prices before the cycle turns. While indicators for Britain are neutral, BCA thinks there could be further weakness in the short term.

Perhaps the investment conclusion that people would find the most surprising is the foreign exchange outlook. The BCA editors are bulls of the dollar, at least in the short term. Their argument is that a combination of international capital flows, the rise in US interest rates vis-a-vis German ones and a weakening of US money supply growth will create a dollar rally lasting several months. In the longer term the dollar will continue to decline, but not yet.

All this is good, cool, detached stuff and all the more credible since it comes from a house that went progressively more bearish through last year. It does not, it should be made clear, carry a strong 'buy' recommendation in any market. This is clearly a time when investors cannot go wrong if they sit on their cash and wait.

In that sense it does support the position of the sceptics. But it also supports opportunistic, small- scale investment by the long- sighted brave. People who buy the right markets now will not look really stupid, provided they are prepared to wait.