Investment: The case for a continuing bull market

SIX months ago, market forces, personified by George Soros, took hold of sterling by the scruff of the neck and dragged it out of the ERM. Most numerate people realised that this could only be very good news for the stock market.

Of course, we still have a few problems, but there is nothing new about that. During the past 40 years, we have lived through periods when there was a real and constant threat of a nuclear war, when inflation raged at 24 per cent, when trade union power was rampant and when we were borrowing in distress from the International Monetary Fund. Present problems like the current account deficit, the growing PSBR, the probable flood of rights issues and the recession have simply replaced the older worries.

In a stock market sense, they are almost comforting - a bull market needs a wall of worry to climb. A bear market will be overdue when there seems to be hardly a cloud in the sky.

The arguments in favour of a strong bull market are very persuasive:

There are five times as many savers as borrowers. Falling interest rates will continue to influence depositors to switch their money into unit trusts and the stock market in a big way.

The average leading growth stock is on a prospective price/earnings ratio of 15.5, anticipating 13 per cent growth in earnings in the year ahead. This is not expensive at this stage in the economic cycle.

Property is more affordable than at any time in the past 15 years. Sales of new homes were up 20 per cent during the first eight weeks of the year.

Green shoots are beginning to appear. Company directors are more confident about the outlook; during the past five months, car industry sales have been well up on last year.

Interest rates are still falling and are now at their lowest level for 16 years. The Bundesbank looks as if it will soon begin to cut German rates aggressively. This should permit UK rates to be lowered again.

The headline inflation rate at 1.7 per cent, with an underlying rate of 3.2 per cent, is lower than it has been for many years and - importantly - is currently below the average dividend yield.

Gilts are strong, with the long gilt yield at its lowest level for about 20 years. It is also twice the dividend yield, a relatively attractive level historically.

The Government is right-wing and in favour of business. It is not particularly able, so it will continue to respond to market forces, which are so much more effective.

The benefits of devaluation, lower interest rates and the lowest wage settlements ever recorded by the CBI will soon be reflected in future profit figures. British industry is becoming leaner and meaner.

The Coppock technical indicator, which has an excellent track record, gave a buy signal three months ago and this indicator remains positive.

A study by Matheson Securities of 10 stock market turning points shows that on eight occasions, on average, the stock market turned downwards 10.2 months after unemployment began to fall. On this basis, the present bull market has a long way to go.

Back to the problems for a moment. Taking the PSBR, for example, I have no idea how the Government will fudge the funding. I imagine it will be a combination of extra tax incentives to buy gilts, some borrowing in foreign currency, some short-term borrowing helped by the banks and an element of under-funding. Somehow or other, I feel the Government will muddle through so that we can all focus on another big worry. Meanwhile, although the ride may be a bumpy one, we seem to have a bull market on our hands for the next few months.

Next week I will recommend a share to outperform the stock market.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after any mention in this column.