Outlook: Inward investment turns into another row about the euro

Farewell Vandevelde; Hedge fund mayhem

The annual report from Invest UK, the government body which logs how much foreign investment the UK is attracting, invariably proves fertile ground for supporters and opponents alike of the single currency. This year is no exception. The pro-euro Business in Europe organisation claims that the 12 per cent decline in inward investment projects last year and the much steeper drop in the number of jobs created, is proof, if proof were needed, that Britain's absence from the single currency is harming the economy.

Business for Sterling, which takes an altogether dimmer view of the euro, argues that the report proves the exact opposite, pointing to the 10 per cent rise in the UK's stock of global investment last year. In truth, the report is a knock-out blow for neither of the protagonists. On the one hand, the decline in investment would certainly appear to point to wariness among foreign investors about whether Britain is a good place, long term, to locate a business.

On the other, every country in Europe has suffered from declining levels of inward investment over the past 12 months as a result of the global economic slowdown. Moreover, if Britain's absence from the euro really has become such an issue, then why is that there was an increase in inward investment last year among precisely those companies who are most dependent on exporting goods from the UK? The strength of sterling against the euro did not deter Nissan, Honda or BMW from spending heavily last year on new manufacturing capacity.

As Invest UK tried valiantly to point out above the shouting match, the predominant reason for the decline in inward investment last year lay well beyond Europe's shores. The key factor was the decline in investment from the US, which accounts for 40 per cent of direct foreign investment in the UK. For corporate America, parochial arguments about whether Britain enters the euro paled into insignificance last year compared with the damage done by the collapse of the high technology sector and 11 September.

In any case, there now appears to be an assumption on the part of many big foreign investors that the UK will enter the euro sooner rather than later. Just ask Nissan in Sunderland. Or even better still Honda in Swindon. Honda forecasts that its UK operations will be profitable in two years time on the basis of a sterling/euro exchange rate which is 15 per cent lower than at present. This is not the sort of exchange rate you want if you are packing your bags for a holiday in Tuscany, but it would underwrite the nascent recovery in manufacturing seen in yesterday's industrial production figures, and it may be the sort of level at which the pound eventually settles.

Farewell Vandevelde

So farewell then, Luc Vandevelde, whose reign as chairman and chief executive of Marks & Spencer lasted barely more than two years. Well, perhaps not quite. Mr Vandevelde doesn't fully give up his executive duties until next January and even after that he will remain in situ as part-time chairman for as long as he likes. Even so, it seems a bit early for Mr Vandevelde to be hanging up his boots. The passage that Mr Vandevelde now makes into the higher echelons of the corporate great and the good generally requires rather more time before the mast.

The Belgium born supermarkets supremo seems to have done a good job in stabilising a sinking ship, throwing the excess baggage overboard, albeit at knockdown prices, and starting the process of revival, but as things stand it's a job which is only half done. Mr Vandevelde has been lucky in having the following wind of a consumer boom to help his turnaround story. What's more, it's been a consumer boom where the emphasis of spending has shifted from technology and mobile phones back to clothes once more. In such benign conditions, it would have been hard to fail. At the annual meeting yesterday, Mr Vandevelde ominously warned that improvement is going to be much less easy to achieve here on in.

None the less, Mr Vandevelde seems to have done most of the right things since he arrived at M&S with the promise that if he hadn't shown clear signs of a turnaround within two years, then he would fall on his sword. The sceptics, who pointed to his lack of experience both of clothes retailing and the UK retail market more generally, have been proved wholly wrong. Bringing in the youthful Roger Holmes as managing director of UK retailing proved a master stroke, and it is perhaps Mr Holmes' ambition that best explains Mr Vandevelde's decision to move upstairs.

At the age of just 42, Mr Holmes becomes the youngest chief executive in the FTSE 100, apart, that is, from the boy Simon Wolfson at Next, who is barely out of short trousers and wouldn't be there at all but for the patronage of his father, worthy of the post though he is proving himself to be. Mr Holmes was threatening to walk to pastures new unless he got the top job soon, and he wouldn't have been short of offers. So it will fall to Mr Holmes to complete the job that Mr Vandevelde has started. He'll struggle to achieve the record £1bn in annual profits achieved during the glory years of Sir Richard Greenbury. Those sort of margins are almost certainly gone for ever. But at least the company won't now fall to the vulturous intentions of Philip Green and the veritable army of other chancers that were circling the floored retail behemoth just three years ago.

Hedge fund mayhem

Fund management as an industry may be down on its uppers, but for some the present bear market is like manna from heaven. Harvey McGrath, chairman of Man Group, a specialist provider of alternative investment strategies, or a hedge fund operator in other words, claims to have attracted $1bn of new funds over the past three months with demand still strong both from retail and institutional investors. Few fund managers can say that.

Every time you look, the traditional "long" funds seem to have lost another so many per cent of their value. Many hedge funds, by contrast, are at least managing to protect their client's capital and some are doing very well indeed. Most of them have achieved this by shorting the market. In a bull market you make money by buying shares. In a bear market you make it by selling shares you haven't got for delivery at a later date and then buying them back when the price is lower.

With the growth in hedge fund investment, shorting activity is in danger of getting completely out of hand and it may even have become a contributing cause of the constantly falling stock market. A market purist would tell you that you cannot successfully short a fundamentally sound stock, but the theory is certainly being tested to its absolute limits right now. Often hunting in packs, the hedge fund operators have become unsavoury purveyors of false rumour, gloomy hearsay and doomsday predictions. They have also in themselves become an investment bubble. Where money is generally hard to make, it concentrates on those areas of investment which seem to buck the trend, thereby eventually ensuring a substantial misallocation of capital. The boom may be over, but speculation has never been more fashionable, and the hedge fund bubble is going to end badly as surely as the technology one did.

jeremy.warner@independent.co.uk