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To: Selectric II who wrote (170010)	6/28/2002 11:49:00 PM
From: stockman_scott	Respond to of 176387

A year when the trust bubble burst news.ft.com Year when the trust bubble burst Published: June 28 2002 21:38 The Financial Times It began with Enron and ended with WorldCom. That sentence sums up a melancholy first half for equity investors, when the US, UK, French and German markets all suffered double-digit losses. If 2000 was the year when the dotcom bubble burst and 2001 was the year when investors faced the horror of mass terrorism, 2002 has been the year of corporate shenanigans. As one scandal has followed another, investors have gradually lost confidence in the integrity of US corporate accounts. And if you can't trust the numbers, why should you buy the shares? The opinions of the executives themselves about the numbers seem perfectly clear. As Bijal Shah and Dhaval Joshi of Société Générale point out, share sales by US directors outnumber purchases by four to one. In the past, such a predominance of share sales has been a pretty reliable lead indicator of disappointing profits growth. At the start of the year, most investors were hoping for at a global economic recovery, led by the US. That expectation is broadly on track. But it is not showing up in higher revenues for the corporate sector - according to SG, US business sales are still falling, year-on-year. Clearly, individual companies can improve profits during periods of flat or falling sales by cutting costs. But at the overall market level, one company's costs are another company's revenues. So it is not surprising that US directors are sellers of their own stock and it is understandable that global investors are pessimistic about the prospects for profits growth. Disillusionment with the US corporate sector is also showing up in the foreign exchange markets. The dollar dipped close to parity with the euro this week and the Japanese have been desperately intervening to prevent the yen from rising too far against the greenback. A dollar fall presents its own challenges for the global economy. During the late 1990s, a strong dollar more or less suited everyone; European and Asian exporters enjoyed the competitive boost while lower import prices kept the lid on inflationary pressures in the booming US economy. Globalisation and the emergence of China as the ultimate low-cost producer were sending deflationary pressures through the global economy. The strong dollar allowed Europe and the rest of Asia to export these pressures to the US, which was strong enough to take the strain. If the US is now going to send those pressures back, how will Europe and Asia cope? Jay Pelosky, the Morgan Stanley strategist, hopes that the rest of the world can take over the US's role as the engine of growth. Viewed in this light, a falling dollar might be positive for the global economy. But at the moment, the dollar's weakness seems more of a function of concerns about the US rather than enthusiasm for the prospects of Europe and Asia. The weakness of the dollar - and the third consecutive negative year for equities - have prompted a natural enthusiasm among investors for alternative asset categories. With returns on cash not that appealing, investors have understandably turned to physical assets. The US and UK are enjoying residential property booms. Gold has leapt past $325 an ounce, and the mining and forestry sectors have been two of the best three equity performers in the world. Within equities, Europe and the US have been left far behind by emerging markets such as Indonesia, South Africa and Russia and by Japan, arguably the ultimate contrarian play. For traditional fund managers, the strong performance of gold and emerging markets, while interesting, will be of little comfort. Few will have more than a token exposure to gold or Indonesia. For pension funds and insurance companies, this third successive year of dismal investment returns is becoming a mounting problem. Both groups have promises to keep - promises that depend on healthy financial markets. Weak markets either force them to raise more capital or to switch from equities into bonds - a process that only accelerates the market's decline. Such forced sales are not yet widespread - and the UK regulator tried to head them off yesterday by relaxing the reslilence tests on the insurance industry. But perhaps there will be no more shocks. Arguably the markets have spent the first half of the year in a funk about a whole spate of bad news - not just the US corporate scandals but violence in the Middle East, tension between India and Pakistan and the US government's warnings about further terrorist attacks on the mainland. If anything positive has come out of all this worrying, it is that central banks in the US, UK and continental Europe have not felt able to take back any of the emergency rate cuts they made in the wake of September 11. In the first quarter of the year, bond markets were worried that the central banks might be taking their eye off the ball. But in the second quarter, bond yields fell sharply as investors realised there was little justification for higher short-term rates. So it is easy to envisage a positive outlook for equities in the second half. The world muddles along without war or significant terrorist incidents. There are no more scandals on the scale of Enron or WorldCom. Short-term interest rates stay low and bond yields fall further. The global economy and corporate profits gradually pick up steam. All of this could come to pass. But it will take a while before investors feel confident that they have turned the corner. Any recovery in equities will be halting and vulnerable to external shocks. philip.coggan@ft.com