COMMENT: Forever blowing bubbles

By SAM FLEMING FOR MAILONLINE
Updated:

The tail end of the deepest recession since the Second World War might seem an odd time to fret about irrational exuberance.

But as yesterday's figures from Aberdeen Asset Management show, investors are becoming remarkably perky considering the crushing downturn we've been through.

The Scottish money manager, which has just snapped up part of Royal Bank of Scotland's funds division, reports that inflows into its equity funds are at an all-time high at £3.4bn.

FTSE 100

Caution! Investors are becoming remarkably perky considering the crushing downturn we've been through


Indeed, across the industry, retail buying of unit trusts and open-ended investment companies is reckoned to have exceeded £25bn in 2009, beating the previous record of £17.7bn set during the 2000 tech bubble.

Given the dire returns available in deposit accounts, it is hardly surprising that savers are looking to get a bit more bang for their buck. But there are reasons to be concerned about the resurrection of investors' risk appetite.

Equities, commodities, debt, and property have seen stunning rallies since the depths of the 'great panic' last year.

The FTSE All-Share Index is for instance, by some measures trading at a punchy 19 times earnings following a 57pc rally from its March lows, while UK house prices are up 9.4pc since April. On commodities markets copper has rebounded to levels last seen in the summer of 2008, while oil has breached the $80 mark.

The Bank for International Settlements is worried enough to invite leading investment banks to Switzerland this weekend, warning them that 'firms are returning to the aggressive behaviour that prevailed during the pre-crisis period'.

If you are bullish enough about the global economic prospects, then stronger asset prices are perfectly justifiable. We may have been through near-Armageddon, but this doesn't mean there won't be a potent recovery in 2010.

But the problem is that the rebound has been seeded not by strong economic fundamentals, but by ultra-low interest rates and central bank money-printing exercises. Free money makes for bountiful conditions for speculators, but it will not last forever.

And the outlook in advanced economies remains grim. It is hard to square buoyant investor sentiment with the dire jobs figures that came out of the US and eurozone yesterday.

In fact we are living out the worst fears of those who warned of 'moral hazard'. Investors have yet again been given copious evidence that the authorities will cushion them from their folly by slashing rates to the floor in a severe crisis.

Federal Reserve chairman Ben Bernanke, currently mugging up for his Congressional confirmation hearings, remains religiously opposed to the use of interest rates to burst early- stage asset price bubbles. The Bank of England adopted a similar position in a paper released late last year.

So having helped generate the conditions underlying yet another series of asset price bubbles, central banks once again find themselves without the tools or even the will to deal with them.

They are understandably petrified of repeating the errors of 1930s America and 1990s Japan by derailing a nascent recovery though premature policy tightening.

But as a result they sit paralysed and inactive, leaving the City and Wall Street free to make hay while retail investors rediscover their appetite for adventure.

An implosion in America's overvalued property market brought the crash of 2008 upon us, only seven years after the bursting of the tech bubble.

Let's hope we are not on the cusp of yet another re-run.

Virgin promise

Virgin Money's avowed determination to turn itself into a fully fledged bank can only be welcomed given the paucity of competition on the High Street.

But the laudable enthusiasm of Sir Richard Branson and his sidekick Jayne-Anne Gadhia doesn't necessarily translate into credibility. Virgin Money has a modest track record and only generates profits of £27.5m.

And it has little experience of the make-or-break home loans market, having sold its stake in mortgage business Virgin One to Royal Bank of Scotland in 2001.

Branson will need to bring in a more heavyweight management team to back Gadhia up if he is to convince the authorities that Virgin Money is a viable owner of a major banking business.

His firm may have bought a useful banking licence through yesterday's acquisition of Yeovil-based Church House, but the authorities need to set a high bar before authorising a more substantial banking takeover by the bearded knight. We have had enough mishaps in the financial sector already.

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