Personal Finance: Sideline cash to cushion setback

THE ONLY surprising aspect of this week's dip in share prices has been that it did not happen sooner.

Markets had actually been trending down on both sides of the Atlantic for a little while. A correction of near 10 per cent had been achieved by the middle of the week - hardly the sort of move of which dives from the 52nd floor of a broker's office are made, but significant nonetheless.

It was all achieved with little fuss. The serious evidence - profit warnings, analysts' downgradings, and so forth, were already known. So what actually made the difference?

It was a respected market commentator who called the turn. Ralph Acampora, equity strategist at Prudential Securities and a noted bull, forecast an "interruption to the bull markets" - and that was enough. For one day at least.

The pressures in financial markets have been really quite remarkable. On the one hand nobody denies that valuation levels are extended. The so-called "Goldilocks" economic situation in the US (neither too hot, nor too cold) has led to sustained growth without overheating.

Of itself this is enough to justify some rather more extravagant price levels than those hitherto acceptable. But when you put this against a background of lower inflation and low bond yields, it is no wonder that people are prepared to pay more for equities. This situation is only exacerbated when supply is restricted by share buybacks and takeovers.

The most important single factor behind this sustained bull market, though, has been the build-up of cash. Money in the mutual fund industry in the US now exceeds that in the banking system.

If we need a model for stakeholder pensions in this country, we need look no further than 401Ks and IRAs (tax-advantage pension plans in the US). The investment cash these have created, and the resultant demand for shares, have helped keep the US market alight. Until recently that is!

The big questionmark is not so much what effect the implosion of the Asian economies will have on global trade, but whether or not this is of any relevance in terms of market pricing in the US and UK. In fact Asian investors are playing a surprisingly small part in the global money market scene. British holders of treasury bills now outnumber the Japanese.

Asians may have less money to spend, but they were only ever an important influence at the periphery of more esoteric markets, like high-value central London property, for example. Indeed the problems in the Pacific Rim have, if anything, driven money into the supposedly safer havens of Europe and North America.

But we cannot get away from the fact that many companies will make less money as a result of the past year's turmoil on the other side of the world. We only have to look at Japan to realise what a buyer's strike can mean - both in terms of consumer spending and investment patterns.

At present there is sufficient money sitting on the sidelines here and in the US to ensure that any setback is met by a healthy wave of buying, as those who raised money too early or delayed committing cash flow while the market continued to rise seek to make their positions look better. We really do have to decide soon what the right price to pay for financial assets should be.

Nothing has happened yet to suggest that the system will break down, but there are potential happenings that are not beyond the scope of our imagination, and which could ensure investors run for cover. This government, needing to expand its borrowing requirements, is but one, although in the end we all really dance to the tune of American markets.

Just for the present I think it is worth waiting to see whether we really have seen the end of the current tremors, or whether the bad news that will surely continue, will translate into a share buyers' strike.

Brian Tora is the Chairman of the Greig Middleton Investment Strategy Committee

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