DP Money: History in the making?

IT IS almost certain that the Great Technology Bubble of the late 1990s will rate alongside the great manias of history -the South Sea Bubble, Tulip Mania and the Roaring 20s to name the most obvious examples.

Because bear markets tend to be more compressed in their duration compared to bull markets, their effect both financially and psychologically tends to be much more intense. For investors, seeing beyond the present can sometimes be difficult. 2003 has proved to be as traumatic as the previous three years. In January, the market saw an unprecedented 11-day consecutive decline which set the scene for continued volatility and uncertainty. The changing aspirations surrounding UN prevarications over resolutions, the decision to undertake military action in Iraq and its relatively rapid course,propelled the market in different directions as news was absorbed. Perhaps potentially the most historical moment of this bear market was seen at the close on March 12th, when the UK share market yielded more in dividend terms than the UK bond market, the first time this had occurred since the late 1950s. It appeared that temporarily the appetite for risk had disappeared,but this was soon confounded by a near 25pc rally in the UK market.

The emergence of financial buyers for companies in the market through takeovers is now beginning to alert investors to the fact that trade buyers feel it is cheaper to purchase a business through the Stock Market than to build one from scratch. Clearly if investors such as Philip Green can identify the benefits of longer term cash flows in the retail sector when compared to depressed market valuations, other investors should take note.

Over the last 10 years the real returns on equities has been hardly better than cash, although it must be said that this return has been scarred by the experience of the last three years. Over longer periods, the attractions of equities re-assert themselves and confirm that added return is rewarded for taking on risk.

Whilst in the short term, the future for equities remains unclear, the very evident cost-cutting by companies allied to improving cash flows and debt repayment will place many businesses in a strong position to take advantage of an improvement in the macro economic environment. History may now be on the side of equities.

Ian Bakewell,Director of BWD Rensburg Investment Management