London may offer investors best value in 2000

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The Independent Online
STOCK MARKETS have again defied the sceptics this year, rounding off the century in buoyant form, with many leading stock indices at or close to their all time highs. Fortunately for me, I was in relatively optimistic and bullish mood 12 months ago, unlike many, so looking back at my annual predictions for markets, I am made to look rather clever (for a change, some of you may laugh, unfairly I should add).

As it happens, you could have chosen to invest in almost any bourse bar Ireland and Columbia, and you would have been in the money, such was the soaraway performance of stocks and shares last year. The return on our own FTSE 100, a respectable 17 per cent, looked pedestrian against many others. Personally, I opted for Paris, up just over 48 per cent in absolute terms, and Frankfurt, where the Dax index was up 37 per cent. Of course, if you were a sterling investor in these markets, the weakness of the euro would have dented these returns a bit, but even adjusting for currency fluctuations, the CAC was up 31 per cent and the Dax by 21 per cent.

Unfortunately, I cannot pretend to have been wholly right in my predictions. I failed to see the turnaround in Japan, where the Nikkei 225 ended the year up 36 per cent, preferring instead to stick by the adage which has served so well for the Tokyo market throughout most of the 1990s - "avoid like the plague". Taking into account the parallel strength of the yen, the Nikkei offered sterling investors a sensational 55 per cent return last year.

But the one which I guess we are all kicking ourselves over is the American hi-tech market Nasdaq, up an astonishing 83 per cent in dollar terms last year and even more for sterling or euro investors. I am not aware of any UK pundit, apart from those whose job it is to persuade investors to stick their money into US hi-tech funds, who foresaw that one.

Yet Nasdaq's performance is instructive in several respects. Look beneath the performance of the main indices, and the same pattern repeats itself across world markets. Anything to do with technology, the Internet, and telecommunications has soared. As for the rest, it has tended to be flat at best. Some sectors, such as traditional retail, have bombed. Generalisations are rarely capable of being sustained when it comes to stock markets, but a broad pattern does emerge here. As my colleague, Hamish McRae puts it in the today's review section, the new economy has come to the rescue of the old one.

It is all very well to say that stock markets have soared, but if you were not in the "new economy" sectors, you would probably have lost money this year. This is as true of Japan and the Far East as it is of London, Frankfurt and New York. Out with the old and in with the new has been the theme of stock markets at the turn of the millennium, somewhat appropriately, you might think.

The 64,000 dollar question; where do stock markets head from here? After such a sustained, 20-year bull run, in the US and London at least, the immediate knee-jerk response would be "down". In Europe and more particularly in the US, equities have enjoyed an exceptionally long period of above average returns, possibly the longest ever, and unless history is bunk, this has to come to an end eventually. Moreover, it should be remembered that the present euphoria in stock markets is really only a two-month old phenomenon. Up until the beginning of November, even the Dow looked as though it might close the year in negative territory.

The buying frenzy of the last two months may therefore be a temporary thing, caused in part by the way the Federal Reserve and other central banks have been injecting liquidity into the financial system in anticipation of a millennium bug-inspired panic. Much of this assistance, it now appears, has been unnecessary, and inevitably policy makers are going to have to tighten markedly soon after the new year. The indiscriminate and speculative nature of much of the recent buying, makes the possibility of a nasty hangover that much more likely.

But whatever the short-term vagaries of stock markets, there is good reason for optimism as we head into the next century. Growth is strong and inflation is low, a benign combination which, barring acts of God, technological catastrophe or all encompassing human conflict, looks like holding good for the foreseeable future. Interest rates are on the rise once more, both in the US and in Europe, and dearer money is always bad for shares as well as bonds. But this time round, the peak is going to be lower than in previous cycles. A gentle application of the brakes may be enough to do the trick.

Valuations are high, unsustainably so for many TMT stocks (technology, media and telecoms). Since at this stage it is hard to know who might win and who might lose from the new economy, investors have chosen to treat them all as winners and there is bound to be a reckoning at some stage, when the quality will be sorted from the froth.

But again it is hard to see the bubble bursting any time soon, and it is even more difficult to know what its collateral damage might be when it does. Indeed, such is the present degree of excitement about the new economy that we may have broken through into a new, two to three-year phase in this already long, long bull market.

Bull markets, like business cycles, do not die of old age. Rather, something has to come along that kills them off, something that changes the psychology of investors, causing fear to overcome greed and prompting a collective decision to sell. There is no such reason for mass panic right now, with the obvious caveat that there is still time for the dreaded bug to strike.

So my prediction for the year 2000 is more of the same. As for which market to go for, the question seems almost irrelevant, such is the degree of homogenisation across world markets which has taken place over the last year. Sector allocation has become a good deal more important than geographical allocation, another manifestation of globalisation, I suppose. But to the extent that national markets do still matter, I suspect the best value might be found in London.

Britain has some great companies, small as well as big, thanks to the present new issues boom, and London is a good deal less highly valued than the US, Japan, Germany and France. If you've got this far, here's wishing all our readers good health and prosperity for a new century.