INVESTMENTS

If the second half of the year carries on the way the first half let off, 1995 is going to turn out to be a bumper year for the world's stock markets. In the last 10 days, we have seen the Federal Reserve cut US interest rates, re-igniting an already fired-up Wall Street. This was followed almost immediately by a big 12 per cent bounce in the Tokyo stock market, which almost certainly marks the final turning point in the savage bear market that has taken the Nikkei index down by 65 per cent in five years.

The UK stock market, meanwhile, buoyed by Mr Major's re-election, seems to be moving inexorably back up towards the all-time high reached at the beginning of last year. It will be a surprise if it does not breach it before too long.

Wall Street, as we have discussed before in this column, is certainly due a significant correction soon, but whether it will be enough to interrupt the onward march of the market is less certain.

It still gives all the signs of being in rampant bullish mood: interest rate cuts by the Fed traditionally give a powerful boost to the market, and the period ahead of a Presidential election is also normally good for the stock market. US equities have given investors a total return (that is, taking dividends and capital appreciation together) of 20.2 per cent in the first half of the year alone. The UK market has provided a total return of 10 per cent in the past six months and 17.3 per cent over the past year. The Hong Kong market is up 12.4 per cent so far in 1995. All these numbers are high by historical standards, particularly in real terms, taking inflation into account. The question remains how long this furious pace can be sustained. One serious market-watcher who has few doubts that the bull market is set to continue on both sides of the Atlantic is Robin Griffiths, who does the charts - or technical analysis, to give it its fancy name - at the brokers James Capel. Now chartists are an emotive subject in the investment world: it is fashionable to write them off as little more than necromancers. Has anyone, goes the common jibe, ever met a technical analyst who has made a fortune from spotting trends in his charts?

Yet many professional investors do find charts useful - and for a simple reason. There are scores of chartist techniques, but most do have one simple thing in common: the patterns they trace reflect the flow of funds into and out of different markets. They are, if you like, the footprints left behind by the thousands of individual buyers and sellers who make up the market.

As markets do behave in regular cyclical patterns, what the charts show is therefore a useful input into any investor's decision-making process. After 25 years in the business, Robin Griffiths is experienced enough - or perhaps can now afford - to say that nobody will get rich by slavishly relying on charts alone to tell them what to do. But they can certainly help to test investment hypotheses and ideas, which is exactly how most professional investors use them. Griffiths' view now, reading his charts, is that the momentum of Wall Street looks unstoppable in the near term. While he expects a correction of 5-7 per cent at some point in the next few months, he believes the market will then take off again "like a rocket". He reckons the Dow Jones index, now 4,727, is heading for 5,400 before the Presidential election next year, after which, if history is any guide, it will take a hammering.

Of course traditional valuation indicators on Wall Street, like a dividend yield of barely 2.5 per cent, look worryingly high, but markets always overshoot in one direction or another. Griffiths' conclusion for his clients at James Capel is: "Do not stand in the path of a bulldozer, express train, or tidal wave. It just isn't a shrewd thing to do". (This is not the same as saying investors should necessarily chase the market higher.)

Griffiths is also bullish about the UK market. He expects the Footsie index to breach its all-time high (3,520) some time this year, and 4,000 next year. The bull market is a strong one and could last into 1997. This view is also reinforced by Griffiths' latest gizmo, a "neural network" known as "Joshua", which uses a host of statistics to try and replicate movements in the Footsie index. (Never forget that stockbrokers, even serious and respected ones like Griffiths, are perforce in the marketing business first, and the investment business second).

Finally on Japan, the charts at James Capel reinforce the message that Griffiths found first-hand on his latest two-week visit to Japan last month. The economy is in a horrible mess; even the mighty Toyota can make no money with the yen at 80-85 to the dollar; and the government has months only in which to resolve the banking and financial crisis that is dragging Japan deeper into a deflationary spiral.

As far as the stock market is concerned, however, the omens are looking up. Having lost 60 per cent of its value in five years, it is clearly approaching a bottom. Until last week, there was a serious danger of it falling through the 14,000 level, a key resistance level. In that case, it could have gone on falling like a stone, Griffiths feared. But after the big bounce of the last 10 days, the signs are that the worst may already be past. The next few weeks will tell us for sure.

Those who follow the stock market and like to make their own investments could do worse than spend a few pounds on Where Are The Customers' Yachts? (John Wiley, pounds 14.95). First published in 1940, and now reissued, this classic stock market text takes a wry and humorous look at the ways of Wall Street. The author, Fred Schwed Jr, was a trader who lost a fortune in the 1929 crash and concluded that it was better to write about the market than to go on playing it. Although clearly dated in places, it tackles a number of timeless investment themes - not least among them the unremitting campaign by brokers to persuade their clients to trade more actively than is good for them.