Jeff Randall: Japan holds horrible lesson for FTSE 100
[Jeff Randall is a business journalist, formerly the business editor of BBC News and, from 2005, editor-at-large of the Daily Telegraph.]
Labour's unsuccessful candidate in the Beaconsfield by-election, Tony Blair, lost his deposit. Unemployment broke through 3m, a post-war record. It all seems a very long time ago, yet not everything has changed.
In October 1982, Japan's main stock market index, the Nikkei 225, was trading at 7,160. Earlier this week, it dropped back to that level. Yes, after 26 years of extraordinary industrial and technological development, Japanese shares are no further forward than when the compact disc was introduced.
Between then and now, of course, Tokyo investors have enjoyed, if that's the word, a stomach-churning ride. In the late 1980s, the bubble years for Japanese property and shares, the Nikkei surged through 20,000 and then 30,000 to peak at 38,915 in December 1989. At that time, deluxe property in the capital's Ginza district was fetching up to $140,000 per square foot.
Doing business in Tokyo, it seemed, was little more than a get-rich-quick scheme. Most prominent among British players was Christopher Heath, then head of Baring's operations in Japan. His income was astronomical, and so too his spending. He loved the high life, especially racehorses.
He once took me for an expensive lunch to explain how price-earnings ratios of 80-100 for Japanese companies were justifiable, even though shares in their British rivals were trading at 10-15. His line was: "Conventional measurements of corporate performance don't apply in Japan." That was true – but only for a short while. Soon enough, the law of financial gravity began to work on the portfolios of Japanese punters. When the bubble burst, property prices collapsed, securities companies went bust and the Nikkei embarked on a dispiriting 20-year journey of value destruction.
I mention this as an antidote to those who keep telling me that because share prices have dropped sharply in recent days they must be cheap. These are the same people who said that British equities represented "remarkable value" when the FTSE 100 fell back through 6,000, then 5,000 and finally 4,000.
The index closed last night at 3926, about 43pc below its peak of 6930 (reached in December 1999). At that level, if you are prepared to take a very long view, the advice of the bulls will undoubtedly pay off. By a very long view, I don't mean the end of this year, or next, or even the one after. History tells us, the bigger the party, the longer it takes to clear up the mess.
Cambridge University's Clare College has just taken out a 40-year loan of £15m, enabling it to invest in equities, with the aim of reaping a profit half way through this century. That's what I call forward thinking. By contrast, those who are betting heavily on a swift and full recovery in share prices could find themselves in serious trouble. For them, the form book contains a horror story.
Just before the Great Crash of 1929, London's All Share Index touched 39.80, having jumped by 73pc in eight years. After the bust, however, the All Share did not go above, and stay above, its 1929 peak until 1953. A full recovery took 24 years. And before you say, "that's because of World War Two," let me point out that the index crept above 39.80 in 1944, reaching 41.41, but slid to 35.15 during the coronation year of 1952...
Read entire article at Daily Telegraph (UK)
Labour's unsuccessful candidate in the Beaconsfield by-election, Tony Blair, lost his deposit. Unemployment broke through 3m, a post-war record. It all seems a very long time ago, yet not everything has changed.
In October 1982, Japan's main stock market index, the Nikkei 225, was trading at 7,160. Earlier this week, it dropped back to that level. Yes, after 26 years of extraordinary industrial and technological development, Japanese shares are no further forward than when the compact disc was introduced.
Between then and now, of course, Tokyo investors have enjoyed, if that's the word, a stomach-churning ride. In the late 1980s, the bubble years for Japanese property and shares, the Nikkei surged through 20,000 and then 30,000 to peak at 38,915 in December 1989. At that time, deluxe property in the capital's Ginza district was fetching up to $140,000 per square foot.
Doing business in Tokyo, it seemed, was little more than a get-rich-quick scheme. Most prominent among British players was Christopher Heath, then head of Baring's operations in Japan. His income was astronomical, and so too his spending. He loved the high life, especially racehorses.
He once took me for an expensive lunch to explain how price-earnings ratios of 80-100 for Japanese companies were justifiable, even though shares in their British rivals were trading at 10-15. His line was: "Conventional measurements of corporate performance don't apply in Japan." That was true – but only for a short while. Soon enough, the law of financial gravity began to work on the portfolios of Japanese punters. When the bubble burst, property prices collapsed, securities companies went bust and the Nikkei embarked on a dispiriting 20-year journey of value destruction.
I mention this as an antidote to those who keep telling me that because share prices have dropped sharply in recent days they must be cheap. These are the same people who said that British equities represented "remarkable value" when the FTSE 100 fell back through 6,000, then 5,000 and finally 4,000.
The index closed last night at 3926, about 43pc below its peak of 6930 (reached in December 1999). At that level, if you are prepared to take a very long view, the advice of the bulls will undoubtedly pay off. By a very long view, I don't mean the end of this year, or next, or even the one after. History tells us, the bigger the party, the longer it takes to clear up the mess.
Cambridge University's Clare College has just taken out a 40-year loan of £15m, enabling it to invest in equities, with the aim of reaping a profit half way through this century. That's what I call forward thinking. By contrast, those who are betting heavily on a swift and full recovery in share prices could find themselves in serious trouble. For them, the form book contains a horror story.
Just before the Great Crash of 1929, London's All Share Index touched 39.80, having jumped by 73pc in eight years. After the bust, however, the All Share did not go above, and stay above, its 1929 peak until 1953. A full recovery took 24 years. And before you say, "that's because of World War Two," let me point out that the index crept above 39.80 in 1944, reaching 41.41, but slid to 35.15 during the coronation year of 1952...