Written for Scotland on Sunday

by Alan Steel

7 November 2010

Perhaps I'm slow on the uptake but I've just noticed we are only a couple of months away from the end of the first decade of what was referred to 10 years ago as the new Millennium.

How many of us remember the mix of excitement and trepidation around as the last Millennium closed? Optimists believed it was a new paradigm, a golden age of prosperity and opportunity. Pessimists, thanks to a belief computers wouldn't recognise a year beginning with 2, predicted planes falling out of the sky and civilisation as we knew it grinding to a halt.

As a consequence, optimists partied in celebration while pessimists cowered in basements surrounded by tins of beans and lit candles.

In the last year of the old Millennium investors piled into Technology shares. It was known as the Dot Com Boom as you may remember. Those companies providing real goods and services to real people saw their share prices fall behind.

We all know what happened next. The Dot Com Boom bust a few months later, with Tech shares falling as much as 90% or disappearing completely. As a consequence, we now believe stockmarket investors experienced a lost decade. Not so.

Investors canny enough to stick with the real world, e.g. in equity income funds managed by the likes of Neil Woodford, or in emerging markets funds, have done very well indeed with values up anything between 100% and 300% or even more. Meanwhile well known Technology unit trusts are still down over 50% from their previous high ten years ago.

I debated this with Mike Williams of New York, a US fund manager and market commentator, when he was in Scotland a couple of weeks ago.

Mike tells me he came into the industry in 1982 and was told things had never been that bad. Just to recall, at the time, US inflation was 15.5%, bank rate 20%, mortgages cost 17%, and unemployment was 10%. Financial pundits saw no future for the country. The UK was much the same, with high inflation and borrowing costs, and unemployment over 8%.

Things were so bad Gold hit $850 an ounce and was the only investment on the News. The Dow Jones Index was only 970.

Today, we are told yet again things have never been so bad, which is odd when US inflation is only 1.1%, bank base 0.25%, and mortgages cheaper than ever. Unemployment is 10% again.

Gold is now over $1,300 an ounce - some inflation hedge that! - and the Dow Jones Index well over 11,200. So what was the better inflation hedge? Not Gold.

If we compared these two economic scenarios, one with high inflation, high interest rates and high unemployment, the other with low interest rates, low inflation and equally high unemployment, and you ask yourself which is likely to be better for future economic prosperity, it's obvious. And it's not 1982!

Why do optimists and pessimists see things so differently? Ed Yardeni, New York analyst, tells us pessimists today foresee a 3D scenario for the global economy - debt, deflation and depression. Optimists see a 3P scenario - productivity, profits and prosperity. And they have good reason. There's never been so much cash in US corporate balance sheets, a cash mountain almost equal to a whole year's income in the UK.

As Mike Williams was entering the industry in 1982, a young man called on me representing a US Unit Trust. He was Scottish and based in San Francisco close to what has since become known as Silicon Valley. He was hugely optimistic about the future of Technology. His name was Jim Mellon. In the following 12 months the fund he managed grew by over 200%. Subsequently he became fascinated with emerging markets too, moving to Asia.

Looking back it seems very worthwhile being an optimist. Today he is one of the top 100 richest people in the UK. In September I had dinner with him at his holiday retreat in Ibiza and asked what he was up to. It seems he is off to San Francisco again to write a book about the fusion between Emerging Technologies, Energy, and Bio technology.

He sees huge opportunities for the global economy. Sadly too few investors believe optimists like Mike and Jim. And it's not hard to see why. Even institutional investors don't understand risk related to Emerging Markets. Despite huge opportunities still around, these investors only have 3% of their assets in economies that make up over 23% of the World.

Time may fly for some of us, but not it seems for Regulators. Time stands still for them. Isn't it time for them to recognize risk ratings should be reassessed and brought at least 30 years up to date?

Alan Steel
Chairman
For and on behalf of Alan Steel Asset Management

Authorised and regulated by the Financial Services Authority

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