American fund to flee `bear market' in UK

The Z-Seven Fund, one of just two US closed-end investment trusts that specialise in London equities, is scaling back its British portfolio after spotting what it claims is an impending bear market.

The City is about to be savaged by downward pressures and will not recover until either interest rates start to fall or an election is called, the fund predicted at the weekend.

The fund, based in Mesa, Arizona, is liquidating London stocks that no longer meet its stringent buy criteria in a move that will reduce the proportion of its UK net assets from two thirds to one third.

Analysts are divided about the next move in the UK market, which has soared over the last three weeks. The 150-point rise in the FT-SE 100 index climaxed with a final surge on Thursday, when the Bundesbank cut German interest rates. But on Friday, the index slipped by 38 points to end the week at 3,137.9

Although the Z-Seven fund is small, with assets of just $27m (£17m), and invests mostly in small companies, its president, Barry Ziskin, is widely viewed as an expert on UK markets, having accurately predicted the last bull run. Under his leadership, the fund claims to have significantly outperformed other US-based rivals operating in Europe over the last five years, in terms of net asset value and share price.

Mr Ziskin refused to commit himself to a prediction of exactly where the FT-SE 100 would eventually bottom out, suggesting it could be anywhere from 2,600 to as low as 1,500. "Bear markets aren't neat and tidy," he said. "It could end up a good deal over or under 2,000."

Even though the fund has 98 per cent of its assets in Europe, it is taking its cues from New York, where the soaring Dow has sparked alarm among analysts such as Mr Ziskin, who use a technique called "divergent trends analysis" to attempt to spot bear markets before they strike. This involves measuring the spread between blue-chip indices such as the Dow and wider market indices such as the advance/decline line, a ratio of stocks rising in price against those falling. Historically, a widening gap indicates the last rally before a bear market.

Other warning signs pointing to a downturn in New York include steadily rising interest rates and last year's 30 per cent fall in the Dow Jones utility index, normally a leading indicator for the more closely followed industrial index. "The Dow Jones Industrial is usually more volatile than the utilities, and London is historically more volatile than the industrial," said Mr Ziskin.

Two factors could work against that historical trend this time. First the FT-SE 100 peaked last year long before the Dow, so it may be leading the US markets into a downturn, not following them down. Second, tight monetary policy through the 1990s may mean interest rates are more contained in the UK.