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Outlook: Steer clear of this market madness

SHARES IN Glynwed, the Midlands-based engineering concern, have halved over the last six months. There has been some respite in recent days, but on a historic basis, the shares are still yielding at 11 per cent, nearly double their price/earnings ratio. Normally when such a cross- over occurs, it is strongly suggestive of a big dividend cut to come. It might reasonably be said that although things are bad in the engineering sector, what with the strong pound, high interest rates and plunging world demand, they are not that bad.

This week there's been an upbeat trading statement from McKechnie and a strategic acquisition from Glynwed, which it claims will substantially enhance earnings next year. What's more, Glynwed has signalled its intention to carry on buying back its shares, a policy hardly consistent with a cut in the dividend. Yes indeed, many companies in these bombed out markets are now ridiculously cheap by historic standards, so is not the present downturn a wonderful buying opportunity?

It is still just about possible that policy-makers will do the right thing and that in a year's time we'll be looking back at the present crisis as just another of those irritating hiccups in the onward march of capitalism. Possible, but not very likely. George Soros, who has admittedly become something of a prophet of doom, is calling his next book The crisis of capitalism. Even Alan Greenspan, who is not prone to exaggeration, says he has never seen anything like this in nearly half a century of watching the economy.

In such circumstances traditional valuation methods mean nothing. The mood of markets, and the world's banking system, has become more risk- averse than at any point in recent history. This may be an irrational and over-the-top reaction to events, but banking crises of this type have an awful habit of becoming self-fulfilling. If fundamentally good businesses such as Glynwed are having to pay 11 per cent for equity capital, then they'll give up investing, the economy will sink into recession, and eventually they will have to cut their dividends.

This may be a great buying opportunity, but the wise investor will stay on the sidelines. We are living through one of those periods of valuation madness when nobody seems to know what anything is worth any more. It would be foolhardy even to try to double guess the markets in such circumstances.