Good times yet to return

THERE'S 'never been a better time to invest in the stock market' according to the advertising blitz by fund manager M&G.

It's a point of view. But never is a long time. M&G does append a footnote saying that it excepts December 1973, during Ted Heath's disastrous Conservative reign, or 1929 (though that must depend on the month you invested), or 1914-1918 or 'maybe' the 1987 October crash.

Many brokers and fund managers are also claiming there is an all-round exceptional buying opportunity. Let me put a different case. You can pick many good moments to get into the market. But the sort of unique opportunity M&G claims only arises when, as the saying goes, 'there's blood on the floor'.

The bleeding in London has been limited to a near 25% fall since mid-2000 - painful but not a huge retraction from the excesses of the naughty Nineties. There are various reasons for fearing more bloodshed to come, mainly via Wall Street. We should also appreciate that many of the big market rises in the past were driven by inflation. Profits appeared to boom, but so did all other prices.

M&G picks out the period January 1973 to December 1977 as a particularly difficult period to make money, and notes that £3,000 invested in its unit trusts would have produced £3,967 over the period. Fair enough, but the purchasing power of the pound fell by half over that time. Admittedly few assets then seemed capable of matching inflation. But house prices did, rising by about two-thirds - and mortgages attracted tax relief.

Inflation is now under firm control. It cannot now be relied on to attract investors to the real assets of companies as a means of hedging against the declining value of money. However, a chief reason for doubting the 'buy now' message is Enronitis: the inflammation of profits and loss accounts, to say nothing of balance sheets.

The doubts now cast on claimed corporate profits in the US will continue. And if the accumulated bogus profits of the last few years are unwound, the effect on Wall Street could be massive and would drive down markets everywhere, including ours. The accounting problem in the UK may be less but it is still real. Questions are being asked, for example, about Rolls-Royce and how it arrives at its earnings. Other companies will come under the spotlight as they publish post-Enron results.

In the US, analysts' predictions have still not caught up with the accounting scandals. Their consensus forecast for the Standard & Poor's 500, reports investment bank ABNAMRO (with its usual scepticism), is profits rising 14% this year, to say nothing of 21% next year. A little over a year ago, Wall Street analysts were predicting a handsome rise for the year 2001.

The outcome looks like a 7% fall - even after using now discredited accounting methods. The consensus has been declining in recent months but it will still be remarkable if the US gets anywhere near this year's analysts' targets.

Another lingering worry has to be Japan. Its recent tender of two-year treasury notes was 185 times oversubscribed! That may sound like a grand vote of confidence in the Tokyo government. It is in fact a symptom of the fear businesses and individuals have about the banks with their massive bad loans - as well as the life insurers.

If the Tokyo government continues to bungle things, these businesses could be compelled to sell off their overseas assets - another drag on markets. Good times may be just around the corner, as the old song goes. But the corner looks a long way away.