Special Report on Investment Trusts: Shares climb following ERM exit: Since 16 September 1992, low interest rates and low inflation have started a stampede. Heather Connon reports
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Your support makes all the difference.LAST YEAR was a vintage one for the stock market. The first stirrings of economic recovery, coupled with falling interest rates and the prospect that inflation - already at its lowest for more than 20 years - would stay low, sparked a stampede of share buying which has pushed the stock market to record levels.
The FT-SE 100 Index of shares in Britain's leading companies climbed almost 600 points, or more than a fifth, during 1993. Since 16 September 1992, the day that Britain was forced out of the Exchange Rate Mechanism, shares have risen by almost 50 per cent.
The stampede was led by institutions such as pension funds and insurance companies, and American investors. And small shareholders have not been left out of the excitement, as suggested by the record pounds 9.1bn invested in unit trusts - a traditional method of saving.
They have also been buying investment trusts: in the first nine months of 1993, almost pounds 167m was invested into trust savings schemes, pounds 52m more than for the whole of 1992. And during 1993, investment trusts rose 15 per cent faster than the stock market as a whole as shareholders rushed to get their money into shares.
For some observers, this rush is a clear warning sign. The last time private investors piled into shares with such enthusiasm was in 1987, just before the stock market crash sent shares tumbling 500 points in just two days.
What are the risks of a similar disaster this year? By most historic measures, the stock market looks distinctly overvalued. The price/earnings ratio now stands at more than 18, based on estimates of companies' earnings for 1993, higher than immediately before the 1987 crash.
The yield compares the dividends a company pays with its share price, it can be compared with the interest received on building society and bank deposit accounts. On 1993 estimates, that is now about 3.6 per cent - lower than immediately before the crash.
That does not necessarily mean that shares are heading for disaster, however. Investors are buying shares partly because low interest rates and the inflation outlook has reduced the returns on the alternatives. But low interest rates and inflation also provide a better environment for companies. The enthusiasm for shares also shows that investors expect their earnings to flourish.
However, a rise in US interest rates, a blip in the inflation statistics - even a change in the Prime Minister or the Government - could send investors rushing to sell.
Private investors can partially protect themselves from wild fluctuations by using regular savings schemes. Because these feed money in over time, the average cost of the shares will reflect the ups and downs in the stock market. And it is often far cheaper than using a stock broker to invest occasional lump sums.
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