Euro News 2002
For some considerable time I have been promoting the opportunity of investing in euros. (Whether you like it or dislike it, the fact is that the currency exists). Whilst the currency through the
evolution of time may be dashed on the rocks of economic equilibrium, this does not look to be an immediate prospect. One of the more widely followed measures of currency risk is the "Big Mac Index", which compares the cost of a
McDonald's Big Mac burger in different countries. (Bear in mind that you can buy a Big Mac virtually anywhere in the world). Sterling is widely considered to be overvalued against most currencies. Unsurprisingly, economists vary in their
estimates as to how much sterling is likely to decline having (like me) incorrectly forecast a sharp fall for some years. According to the Big Mac Index, the pound is about 19% overvalued against the euro. Currency markets have been prepared
to ignore the over-valuation of the pound for some time, and have overlooked the burgeoning trade balance, which is big compared with the size of our economy. In the last few months however, sterling has started to falter. In currency
markets where value is poor and momentum is deteriorating, it generally does not pay to fight the trend (we all remember poor Norman Lamont!). In comments issued by global strategists at Cazenove recently, it is very interesting to note the
equity risk premium of various markets in the world. In their algebraic calculation Cazenove have worked out that on a historic basis the US market looks expensive, whilst the Pan-European markets offer quite reasonable equity risk premiums.
In other words, the Pan-European markets are fairly valued. Corrections and Crashes Writing in the FT on June 22nd/23rd, Philip Cogham states: "but investors need to accept that future returns from equities are likely to be
low. In an era of low inflation it seems probable that equities will return only around 7.5% a year - and that assumes no further de-rating of market from here." As you will have read in many of our Review Bulletins and investment
notes, we have constantly made reference to a benchmark return of 7% to 8%, and history dictates that this should still be achievable. Recent corrections in market values are, we believe, extremely healthy. They make the value of shares more
relevant to each companies' ability to produce profits and support dividends. (Enron and Worldcom etc must be put into perspective. Recessions always uncover what accountants can't or won't tell). It should also be remembered that headline
indices are not necessarily relevant to underlying market performance. These indices do not, for instance, include the dividend yield, they ignore Corporate Bond yields, and in a bear market there are still some companies making good profits
and showing increases in share price. Much of the current sell-off is as we predicted, a symptom of re-positioning life insurance funds and pension schemes into lower risk assets in the form of Corporate Bonds and Property Funds, which of
course are performing much better as a consequence. In the End What goes round comes around. (This is not a reference to Big Macs). It is however a factor in all investment management. As with the property market, which will
eventually correct itself, so too should equity performance. Those with long enough memories to remember the early 70s will recall that when the bear market finished, investment return on equities was extremely attractive. From 1987 to 1989
the market recovered, but then did another dip before we moved ahead through the 90s for an extremely attractive investment return. It is my view that investment performance will recover.
We do try not to bombard you with too much information, but as a special exception Patrick McIntosh FLIA (by Diploma) MSFA
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