Just like being a British sporting star, investment markets can radically change from hero to horror on the spin of a coin. Feted one moment as an astonishing victor (although of course as British we would never expect us to actually win) and forgotten as a failure the next. Unfortunately, whilst cynical Brits seem to enjoy tearing down heroes, investments have a habit of bringing others down with them. Volatile markets can be extremely dangerous to your wealth – on their way up, they can suck in the gullible only to spit them out again, somewhat poorer, on the way down.

Sadly this seems a regular occurrence in the market and one that, for many private investors, they seem doomed to repeat. Despite much wailing and gnashing of teeth, most will finally admit their error and in an almost religious confessional, chant that they will not get caught out again. But they will, and they do.

The problem is not just identifying such fashion fads, but more importantly trying to warn investors that they are in danger of losing their hard won money. The gift of foresight is neither common nor reliable in the investment markets, so there is no single measure or signal which can consistently warn investors other than the most human of senses – common sense. Sadly all too often this has to compete with greed and thus often loses out, but the tried but useful maxim must apply – if it sounds too good to be true, then it probably is.

In 2005 the doyen of the global markets were the Gulf indices where oil money poured into these smaller markets and inflated them to an astonishing level; one year on and the doyens had become the dogs with some of the worst performances around the globe. This time it has been the turn of two oriental markets to indicate some worries which should be of concern to the more prudent investor.

For years the Chinese indices failed to perform and the amount of puffing media coverage seemed to be in direct inverse proportion to the performance of the investments - and thus many investors lost money to some outlandish fund manager hyperbole. Then suddenly in the last year it has taken off with a graph that looks more like a moon shot rising vertically off the paper.

Now we all know that China’s economy is still growing rapidly (or so the apparently reliable state statistics tell us!), although at a slightly lower rate than before, and the level of new issuances from Chinese ex state leviathans have been feeding the seemingly insatiable desire to buy Chinese stock. However, only in the past few months has this now resulted in the main indices rising sharply. Given the amount of issuance, given the quality of the issued and given the governance of the issuers, the valuations are looking somewhat overheated. We are not yet in the Year of the Pig, but we could be smelling burnt bacon before the year is out.

Meanwhile across the Gulf of Tonkin, the Vietnamese stock market (the Ho Chi Minh Index) rose 144% last year and an astonishing further 38% in January.  The cause? Well it seems that those old fashioned “capitalist running dogs” may be to blame, with one commentator pointing the finger at “intense speculation on the part of a new kind of foreign investor” – no, not a new kind – these are gambling speculators and not investors.

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Closer to home, the introduction of REITs (Real Estate Investment Trusts – pronounced as reet or right in a Geordie accent) has also provoked an unhealthy swelling in the UK property market. As an investment vehicle, these have already been proven to be very efficient investment offerings in the US for investors, especially for those looking for income.

However, their introduction into the UK market has come at a time of fairly full UK property valuations, and the accompanying promotional bally-hoo has only added to it. There has been a rush for property companies converting to REIT structures and these have certainly tried to satiate a whipped up demand. Whilst accepting the benefits of these vehicles, it may be wiser to let the frothing market pass for the moment and wait until valuations calm down in the months to come. It might be worth recalling that the launch of REITs in the USA coincided with tough conditions in the underlying real estate market with falling property prices and some painful losses for investors.

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I noted that Government expenditure on taxis seems to have reached an astonishing £3.8 million for last year. As part of this, the Department of Transport managed to rack up nearly £250,000 - which is quite remarkable when you consider how they are supposed to be promoting the use of public transport.

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And finally….following on from last week’s advance in Day Glo pigs, comes more news of further enlightenment. A US company has started marketing a range of lingerie that lights up. Apparently a choice of bras (presumably wired) and camisoles are available with colourful light emitting diodes (LEDs) and these can then be enhanced with sequins and feathers. The clothes are described as being very comfortable despite the wiring and the battery. I suspect in terms of safety this may be better in the Californian climate than a damp weekend in London?

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management