Recovery signs don't equal cheap shares

Anthony Hilton12 April 2012

IT IS HARD to remain sceptical when the likes of Bank of England Governor Sir Edward George and US Federal Reserve chief Alan Greenspan are calling the end of the recession, but it is perhaps more important than ever to be so.

Those thinking of plunging in to the market should bear in mind that it is one thing to note that central bankers say the worst of the decline appears to be over, quite another to infer that normal growth is about to be resumed.

It all seems too easy. Already the recession is being dismissed as one of the shallowest on record, but to me it seems the speculation and excess as the market approached its peak surely required a much greater correction if the system was to be properly purged and the US economy restored to equilibrium. There is a strong case that the rally in shares since autumn is a glorified dead cat bounce and that the market will need to go lower than it was on 11 September before real value can be found.

Instead, we are going into recovery with the imbalances still in existence. The US trade deficit is worse than ever, increasing by $1bn a day. The dollar remains high. Americans still consume everything and save nothing. And all this continues to be financed by sucking in massive amounts of foreign capital - starving the rest of the world of the resource it most needs to compete.

Such arguments are brushed aside by people waving statistics that show a productivity surge, a spending surge and even the beginnings of an investment surge in America. But it was mindlessly believing the US statistics that got us into trouble in the first place. The productivity explosion so lauded in the boom turned out to be no more than a normal cyclical upswing. The statistics translated $38bn of actual spending on computers into a $300bn uplift in gross domestic product by putting a cash value on the greater power of the new computers.

Likewise, profit definitions have been changed so that when Wall Street claims to be on an earnings multiple of 24, that number can be doubled, or the market made twice as expensive, by applying conventional accounting.

This is no time for greed to displace fear. Remember that even if the economy is recovering and profits rebound it does not mean shares are cheap. And finally, before you part with your cash think what an American attack on Iraq could do to global oil prices, inflation and economic activity and ask if now really is the time to buy.

NAPF's deal

PETER Thompson, chairman of the National Association of Pension Funds, plans to devote a considerable chunk of his speech at his organisation's annual meeting in Edinburgh this week to a call for the Chancellor to scrap stamp duty, which costs pension funds between £3bn and £4bn a year.

The sub theme of this conference, though, is the furious debate about dealing costs, which eat up as much as Gordon Brown's tax on dividends and stamp duty put together. This was sparked off by last year's Myners Report and is now fuelled by an as-yet unpublished code of practice for fund managers. It proposes that they should tell clients how they implement their investment decisions in a cost-effective manner, name all brokers and counterparties who handle 5% or more of their dealing and detail the financial and non- financial arrangements between them.

It is rough round the edges and still in the realms of good intentions, but the fact that these proposals are being touted in Edinburgh shows how fast attitudes in the industry are changing.

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