Alan Steel said he'd rather back stockmarket gurus than those still piling into property.

As my friend, Gavin, is fond of saying, "We live in interesting times." I managed to grab a week's break earlier this month in Nova Scotia where the weather was really cold but very sunny. It's handy to be away because you can spend a bit of time thinking or reading new material, especially when you're in a different country.

Before I left, I was invited to an investment dinner at Claridges in London. The idea was to get some advisers together, mingling with a few investment folk, and a sprinkling of financial journalists.

But the investment group who organised this took the opportunity of doing a presentation on their soon-to-be-launched investment fund investing in European commercial property. The presentation featured an impressive set of statistics showing over the last 25 years the performance of commercial property versus everything else. The fund launch was also justified on the basis there is such a demand for this kind of thing from the investing public.

When it came to questions and answers, most questions got bogged down on technicalities. What was the expected yield? How would they be going about buying actual properties? Who were the advisers? I thought it was a good idea to ask some stupid basic questions.

So I asked why they only looked at the last 25 years which were skewed by baby boom demographics. And while I was on demographics, I wondered why they were investing in commercial property in emerging European markets, including Bulgaria and Poland, when half their people appear to be in London. I also wondered when was the last time retail investors got it right. Seven years ago they wanted technology funds - enough said!

Later in a quiet corner I enjoyed a few glasses of Jameson's with an equity fund manager who'd attended the same presentation. Would he invest in this fund I asked? Apparently not - even with a barge pole. He shared my concerns. He also said half the new funds coming into that very investment company were for its Property Fund - not a good sign.

When I got back from holiday, Simon, one of my clients, a successful long term property investor, sent me an e-mail stating income yields on listed property companies were now lower than the yield on the FT 100 Index. It is now more profitable to sit in deposit. Hundreds of millions of pounds are flooding into commercial property funds and fund managers can't spend the money quickly enough. He warned the quality of purchases is declining. Time to sell up, he says.

Actually when in Canada I learned that legendary US property billionaire, Sam Zell, who built up his property company over the last 30 years is offering it for sale. Suitors are piling in with offers. The expected sale price of around $37 billion represents 22 x earnings - that's more like an emerging market!

Now I know we've been a bit negative on property for some time. And I'm well aware most folks don't think property can go wrong. But when the herd think nothing can go wrong, it's time to get nervous. But if not property, what?

When I was over in North America, I learned about stockmarket guru Elaine Garzarelli. At the beginning of last January, she predicted a strong equity market in 2006. In May the same year she had second thoughts and turned cautious, forecasting a 5 - 10% near term decline. She was bang on. If you remember by mid June, main markets had fallen anything up to 10%.

She then shifted years again and turned bullish and has held the same view ever since. Again she was bang on. Following her mid June call, in the US the Dow Jones climbed to an all time high and others, such as the S&P 500, the Nasdaq and UK indices set 6 year highs.

Elaine was the stockmarket's most influential guru in the US in the 1980s and 1990s when investors hung on to her every word. Now she's in charge of Garzarelli Capital. She provides investment advice to over 100 institutional clients with aggregate assets of more than $1 trillion.

So the obvious question to Elaine - who's been bullish since October 2002 - is what does she think of 2007? Well, she remains gung-ho predicting another winning year, at least a 15% gain for the S&P 500 in the US. She thinks equity portfolios should be 100% invested - in equities - with perhaps even 10% in emerging markets. Her indicators, which embrace such market measures as the economy, monetary conditions, valuations and investor sentiment are two-thirds bullish. That, she says, is very bullish in her experience. She also thinks main international equities are at least 20% undervalued. Harry Dent reckons it's more like 27%.

Some clients are getting nervous again. They're reflecting retail investor sentiment world-wide. For contrarians, that's a great sign. I'd rather back Sam and Elaine than those still piling into property.


Alan Steel


This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

Alan Steel
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.