Don't chicken out of waiting for the upturn

THERE’S an old business adage - "spread your eggs". It usually applies at times of uncertainty like just now, when my clients ask me what I think the financial future holds after Iraq.

Currently, there is only one certainty - the Iraqi situation will have an effect on the market, but exactly what depends on whether we’re talking about the short (up to two years), medium (two to seven years) or long (seven to 20 years) term. Let’s look at these in turn.

In the short term, don’t assume once the Iraqi war is over that the uncertainty will end. Post-war there will be various issues to be resolved so that we eventually get to the "bottom" with regard to market conditions.

Secondly, there is still a slowdown in the rest of the Western economies and most well-informed pundits think it will be well into 2004 before we see the start of any real growth.

Thirdly, many believe the Dow Jones Index in the United States is heavily overvalued.

One of the best ways to tell a sale value for a market such as the FTSE-100 or the Dow Jones is the price-earnings (PE) ratio, or the price of a company divided by the value of its earnings.

If the PE ratio is high, the market is putting a lot of value on earnings and vice versa. Historically, for the US market as a whole, the average is around 15 to 16 times earnings. Currently the PE in America, based on long-term earnings, is around 26.

There has only been one other time when the PE ratio has been higher than it is now - just before the crash of 1929.

So what, you might think. Well, when the US sneezes, the UK catches a cold, and we are all directly affected .

Bear in mind too that 2004 is a presidential election year. Uncertainty in American politics is sure to affect the markets . So I don’t think we’ll see any real sustained growth until early in 2005.

That’s the bad news. But the medium term holds some good news. There’s a demographic time bomb ticking away which will have a huge positive effect from early 2005 resulting in a long "bull run" from 2005 to 2012.

During that period the first generation of baby-boomers - people born between 1946 and 1960 - will invest as heavily as they can into pensions and savings because they see the retirement finishing line drawing ever closer. This should help fuel stock market acceleration which is overdue. Simultaneously there could be government intervention to help bridge the ever-growing "savings gap".

Then, a second generation of baby boomers, born in the 1960s, will hit peak spending power and this should aid further growth, so the medium term looks good.

But beware the long term. Around 2011 to 2013, the investment cycle will turn again - this time downwards.

This will be accentuated by the demographic time bomb exploding as the first-generation baby-boomers retire simultaneously, thereby cashing in their savings and pension plans, which in turn will erode stock market confidence.

There will also be nearly twice as many septuagenarians alive in 2015 as there were in 1945.

What’s more, these "auld yins" are going to live a lot longer and the Government will be struggling to pick up the price tag of additional pensions and health care. A deep depression will result.

So that brings us back to the "spread your eggs" scenario.

Be very cautious with savings in the short term and then invest and save as heavily as you can when things start to pick up .

Finally, remember that there are asset classes other than stocks and shares. Most pension and life assurance companies have first-class property and gilt-edged funds.

Diversification is more important now than ever. And that’s a certainty.

Joe Capaldi is founder of Capaldi Financial and chairman of the East of Scotland Life Insurance Association