The world turned upside down

THE INVESTMENT COLUMN

When a company is in the business of selling unit trusts, it has a vested interest in whipping up the enthusiasm of audiences at its presentations for the markets and sectors it has positions in. Even knowing that, however, nothing can quite prepare the innocent financial adviser for the evangelical onslaught of a GT Global sales pitch.

Behind the tub-thumping drama, however, yesterday's pitch to London's financial community, the latest stop on a round-Britain roadshow, threw up a torrent of fascinating ideas for investors, one of the more thought- provoking of which was the proposition that the relationship between equities and gilts has shifted, if not permanently then for the foreseeable future.

Inflation has shaped the investment landscape for so long now that it is hard to imagine a world where real assets such as houses and equities (that have a claim on the real assets of companies) do not sharply outperform paper ones such as bonds (gilts) and, particularly, cash.

Since 1972 equities have on average increased in capital value by 1 per cent more than the rate of inflation, maintaining the real value of investments and then some. Gilts by contrast have slumped in real terms, losing 90 per cent of their value in inflation-adjusted terms.

Since the beginning of 1990, however, that familiar picture has been overturned. Over the past five years, gilts have marginally outperformed equities (on a total return basis, which includes dividends). The effect has not been confined to the UK either - if anything the comparison is even more striking on a global basis.

Why should this be so? The answer appears to lie in the impact of inflation on the returns of different assets. In the 10 years from 1975 to 1985, inflation averaged 12 per cent a year and equities outperformed gilts by 13 per cent a year. During the following 10 years, however, inflation was reined in to just 5 per cent a year on average and the outperformance was reduced to just 4 per cent. If GT is right and inflation ends the year at just 1.5 per cent (admittedly a tall order), gilts are likely to continue to be a relatively attractive investment for the first extended period in decades.

But don't write off equities. As Bob Farrell, Merrill Lynch's senior investment adviser in New York, pointed out earlier this week, demographic changes in the US have created one of the most unexpected phenomena of the 1990s. In the past 10 years, equities have increased from 16 per cent of total household assets to 32 per cent, a shift that has been one of the largest drivers of the Dow's current bull run and especially of the share prices of US stockbrokers such as Merrill Lynch itself and Charles Schwab, the discount brokerage which last year took over our own ShareLink.

The reason for the increasing popularity of shares seems to be the US's age profile. As the chart below shows, equity holdings appear to track the percentage of the workforce over the age of 35. In other words, older workers, fretting about retirement and the inadequacy of state provision for the elderly have a tendency to put more of their money into long-term savings plans, mainly equities.

The UK of course is not the US but it seems plausible that the same forces will drive equity holdings here up from the 6 per cent of household assets they currently represent to closer to the 18 per cent they reached in the late 1950s.

That will be good news for stock markets as a whole. Specifically, it will be good news over the next few years for the companies whose stock in trade is handling other people's money. A portfolio of financial companies such as Mercury Asset Management, M&G, King & Shaxon (which owns the broker Greig Middleton and Allied Provincial), BWD and Lloyds Abbey Life could be very rewarding for the remainder of the decade.

Argos catches Nineties mood

Argos, the catalogue retailer, has been true to its recent excellent form over the crucial Christmas selling period. Trading figures out yesterday showing a 14 per cent rise in sales for the five weeks ahead of the festive season have translated into an underlying increase of 8 per cent on like- for-like store space. Even if not up with the double-figure growth recorded by Dixons and Carpetright, these are impressive figures, particularly after strong Christmas performances in both 1993 and 1994.

But Argos has been such a steady performer that yesterday's announcement surprised no one. Profits forecasts for the full year are therefore only being edged up or held at around pounds 120m for last year, which would represent a 20 per cent increase on 1994.

The company's formula of no-frills, value for money retailing just off the high street has really caught the mood of the cost-conscious Nineties. After a blip at the beginning of the decade, when profits slumped to pounds 52.9m, Argos has grown steadily. And the formula still has a way to go before it reaches the whole country.

The 370-strong chain of traditional stores has the potential to reach close to 500, the company believes, while it reckons it could more than double the number of superstores to between 100 and 120. It has also seen off the threat from discount clubs like CostCo and Warehouse Club and with rental and labour costs well below high street rivals, it is well placed to keep them at bay.

The main threat comes from the pounds 200m cash which is currently burning a hole in Argos's balance sheet. The company is keen to diversify, but shareholders will remember the previous venture into furniture retailing, Chesterman, which left a pounds 12.5m hole in 1992's figures.

First Stop, a discount format currently on trial, has gone well in its first few weeks' trading, as have three mini-stores serving smaller populations. Chastened by its previous experience, management is likely to be cautious about more adventurous acquisitions and might rather return cash to shareholders. But the shares, up 4p at 565p, reflect the quality on a prospective multiple of 21. Hold.

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