This article was originally published here in November 2002
A free market is a powerful force. Over history many individuals and organisations have attempted to subvert the normal running of a market for their own profit. Sometimes they succeed and earn themselves a vast fortune. Usually the power of the market they are trying to manipulate breaks them and the market returns to pricing goods freely.
These days it is governments who try to distort markets, either for a perceived common good or simply through misguided policy. A government can intervene in markets in many ways: laws, taxation and direct intervention to name but three. The huge power of a government means their policies can succeed in permanently changing a market. However, when they fail, the resulting fallout can be spectacular.
The biggest market policy failure of the British Government in recent times has to be the ejection of the pound from the European Exchange Rate Mechanism in September 1992. With the benefit of hindsight it is obvious that we joined at too high an exchange rate which lead to trouble for our economy. The pound fell and despite the Government raising interest rates to 12% the pound fell out of the system. Over the next few months the value of the pound fell by as much as 15%.
I was an investment novice at the time but from reading the financial pages in the months beforehand it seemed obvious that the government would be forced to devalue. As early as April 1992 I had invested in a managed currency fund. By the time I sold it in February 1993 I had gained 18%.
More recently the government intervened to support the British coal industry handing a nice profit to shareholders in the privatised UK Coal. However, the intervention in the rail industry, putting Railtrack into administration, was not so helpful.
Looking ahead into the future I can see two trends combining to create a profitable situation. No matter where they stand on the question of replacing the pound with the euro, most economists agree the current exchange rate is too high. The value of the pound must decline against the euro if the British economy is to be competitive in the single currency zone. Imagine that you have bought an asset valued in euros, paying for it with pounds. After your purchase the pound declines in value against the euro. Now if you sell the asset for pounds you will receive more than what you originally paid. You will have made a profit even if the euro price of the asset has not changed.
The government may try to manage down the value of the pound before a euro referendum. This gives an automatic boost to the value of any prior investments in euro assets.
Another event predicted to happen over the next few years is the entry of Eastern European countries into the European Union. Following entry there will be a flow of money from West to East in the form of economic subsidy. Such subsidies should be good news for Eastern European stockmarkets.
If you subscribe to these two predictions, Eastern Europe is likely to be a good place to invest during the next decade or so. The problem is that it is impracticable, even impossible, for the small investor to create a sufficiently diverse portfolio of Eastern European shares. Instead we must invest our money in unit or investment trusts.
This is something that I have been doing for some years. In the mid 1990’s a number of Eastern European focused funds were launched. I bought a lump sum in the Baring Emerging Europe Investment Trust and started a monthly saving scheme in the JPMF New Europe OEIC.
The Baring fund has performed very well. Since launch in January 1994 the investment trust has grown by 14% a year. Unfortunately it has recently announced restructuring proposals, which complicate the situation.
The JPMF fund has not done so well; down by nearly 20% since its launch in November 1997. My monthly saving plan shows the benefit of pound cost averaging as my investment has actually grown by 4% a year. As the price fell my fixed monthly investment purchased more units giving me a greater profit when the price recovered. Despite the poor performance of this fund I am sticking with it as I feel the potential for profit is still there.
Time spent reading or watching the news can be profitable. You can spot an emerging trend months or even years before it happens. The stock market does not react instantly to these major trends leaving plenty of time for the small investor to get involved.