Facts before fantasy in the share market

A SURVEY by JP Morgan Fleming published yesterday showed that there has been a surge in private investor confidence since the fall of Baghdad. Its monthly poll on the changing attitudes of 500 individuals found the number of investors expecting the market to be higher in six months has gone from one-fifth to two-fifths, while the ranks of the bears expecting shares to be lower in six months have thinned from roughly a half to a quarter. Overall, investors are more confident than they have been for a year.

Clearly they have not been talking to Goldman Sachs' Peter Oppenheim, who thinks we are still in a structural bear market. He thinks neither yields nor the equity risk premium have further to fall and that there is nothing to drive a strong recovery in profits. So he cannot see what will get the market moving up again in the short term.

There is a similar mismatch between businessmen and the professional investment community. People running companies are much more cautious than fund managers. Sir Colin Chandler of easyJet this week, Niall FitzGerald of Unilever last week, are at opposite ends of the size spectrum and both were positioned to avoid the worst of any downturn. But both now admit to finding life tougher than expected. And they are by no means alone.

Fund managers only really make money when shares are rising because they get fees from a levy on funds under management. They do not know how to handle a bear market, management not being their strong suit. So they cope by saying recovery is just around the corner - all the way down. Now, post-Iraq, they are even more bullish. It could be drowning men clutching at straws, it could be soundly-based thinking - but how do we tell?

There are two strands to the most powerful bear case I have seen in 30 years. The first is that shares in America are still more highly valued than they were on the eve of the Wall Street Crash, foreign investors have lost faith in the market, the economy has chronic imbalances, the administration has still to earn its economic credibility, unemployment is rising, the consumer is spent out and the dollar is on the slide.

Britain's economy is also seriously unbalanced. Most of the so-called economic growth since Labour came to power has been the equivalent of robbing Peter to pay Paul. Growth has come from consumption, but it has not been earned. It comes from people either spending notional profits from house price rises or borrowing against them. Personal debt levels are now so huge the nation is heading for a credit crunch.

Constant advertisements on TV offering people the opportunity to consolidate their debts and cash in their pensions lend credence to the fear that a huge number of people are being overwhelmed.

A mountain of debt is supported by a house price bubble but while we have been living it up, the past five years have seen almost no productivity growth, nowhere near enough new company formation, minimal investment and no serious wealth creation.

Call me old-fashioned, but I do not think that economic picture supports a strong rise in share prices. It is not even as if equities are ridiculously low - they are back where they were when Labour came to power while the economy looks a lot sicker now than it did then. If shares are rooted in reality, not fantasy, they have risen quite far enough for the moment.

Virt-x value

WHEN stock markets were roaring away, the investment banks decided that what Europe needed was an equity market structure like America's where the trading platforms on which shares are bought and sold would be fully-integrated electronically with one transnational backoffice clearing system.

Well, now they have a lot of what they asked for. On Monday Virt-x, which is a genuinely cross-border market offering prices in all the leading blue-chip shares in Europe, announced that it has developed with London Clearing House a central counterparty that will allow users to manage risk, net-off trades, maintain anonymity and do all those things they said they wanted.

Of course, now it is available the banks that were demanding it can scarcely stifle a yawn. But the more market systems are standardised, the safer, cheaper and easier crossborder share trading in Europe becomes.

It may well be a very long time before politicians are able to deliver a properly integrated European capital market. But the kind of innovation that Virt-x has come up with delivers most of the benefits anyway, so perhaps they need not bother.