George Pitcher: I wouldn’t want to bet on the return of the bull

City analysts believe recent falls on the world’s stock markets mean a return to growth is just around the corner. George Pitcher thinks their logic doesn’t add up

There was an all-too-rare moment of childlike innocence from my 16-year-old daughter at Glorious Goodwood last week. “You’ve lost on the past two races, dad,” she said, “so bet big-time on the next because you’re more likely to win.”

Evidently, they don’t teach probability in the GCSE maths curriculum. So, by way of setting a good example, I sat out the next race and the horse I fancied came in at 16-1. But that’s the horses for you – the bookies only lend you money.

That will be why private equity firm Charterhouse Development Capital was willing to stay in the bidding war with, among others, leisure group Rank to pay a whopping &£860m last week for a management buyout of Coral Eurobet, Britain’s third-largest bookmaker.

When stock markets plummet, the bookies still make money. That’s because there will always be saps like me, taking tips from their daughters. Her credulous assumption that your chances of making money improve if you lose money for a while reminds me of the recent behaviour of some share tipsters.

There is a widespread assumption among many in the markets, who don’t have the excuse of being 16, that as shares have lost 45 per cent of their value it must be a good time to buy them. Shares must offer good value and they are bound to go up. That’s what shares do.

That’s like assuming that after picking a string of losers at the racecourse, I’m more likely to be due a winner and, therefore, it’s time for a bigger bet. There’s an expression for this behaviour – other than being a complete prat – and it’s chasing errors.

Many investors will have bought shares in recent weeks under the assumption that shares are relatively cheap and that even if they have further to sink, over time they will show the kind of handsome returns to which we’ve grown accustomed after years of bull markets.

Maybe they are right. But the attitude is only a slightly more sophisticated version of my daughter’s logic. The standard warning to retail investors is that “shares can go down as well as up”. Perhaps it should be adapted to “shares can go down and stay there”.

It could be I’ve hung out too long with bears, but in the wake of the dot-com bubble exploding in 2000 I wrote here that equities were still ridiculously overvalued, particularly in the US. Those of us who said there was a huge over-valuation to come out of the markets have been largely vindicated.

The mistake is to assume we can carry on as before, investing in equities, linking our pensions to them (ha!) and enjoying stonking returns. It may just be that sanity has returned to the equity markets. This is the reality – it’s the past decade of runaway rises that was the dream from which we’ve just awoken.

Reports that the UK economy is fundamentally sound would seem to support, rather than to contradict, this view. The assumption is that because we’re in relatively good shape in terms of inflation and consequently interest rates, we only need to ride this irritating correction out and normal, bull-market service will be resumed.

But corporate profitability is coming through in some sectors and still having no effect on equity markets, which are are bucketing along the bottom of historic valuations and suggest that the market has taken account of such corporate earnings and thinks it has valued them about right.

Trading reports from blue-chip stocks, such as Barclays, BSkyB, Unilever and Vodafone, should have provided reassurance recently that corporate earnings are on course to meet their projected growth targets of four to five per cent this year. BP offered us news of second-quarter earnings up by 30 per cent; consumer-products combine Unilever’s second-quarter profits rose by 31 per cent and BAT reported a first-half earnings increase of 11 per cent.

Yet the FTSE-100 index is down 22 per cent this year and remains doggedly resistant to such good news. Most simply and accurately, this is because the big institutional buyers aren’t returning to the market. And that’s because they think the market is valuing these stocks fairly.

Analysts point to the US, where it’s claimed we might be facing a “double-dip recession”. Again, this assumes that there are dips before the growth returns – growth that we assume is a natural phenomenon of stock markets.

As long ago as May, Schroder Salomon Smith Barney, the investment-banking arm of Citigroup, was telling us that the factors that drove an 18-year bull market between 1982 and 2000 – apart from short bear legs in 1987 – 1990 and 1998, no longer existed.

The trouble is that an entire generation of institutional investors arrived in the markets during those 18 years, who have no memory of the 17 years of negative real returns that preceded them. Their assumption that we will shortly resume the bull market could be gravely disappointed.

Don’t misunderstand me. We can still make money in a sound economy. All I’m saying is don’t invest it in the stock market for a while. You might as well stick it on a horse.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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