Comment: At last the market rewards those who make real things

GROWTH OR value? The last few days have seen an extraordinary flip-flop in share prices - particularly in the US but also here - as investors try to work out which of these two guiding principles will dominate investment in the coming months, maybe years.

For the last couple of years, growth has been the dominant theme. Any company with some business related to the Internet has found itself valued at some amazing price, even if it has never made a profit. Meanwhile, solid companies making things that people need and buy have found their shares languishing, however profitable they might continue to be.

You can understand that because the Internet-related technologies are changing the world economy more rapidly than any new technology in living memory. Every day, some new use for the Net springs up. Yesterday, it was the downloading of music from the Net to play on personal stereos - an idea that might, if it works, kill the market for CDs in much the same way that CDs have taken over from cassettes and records.

Already about 20 per cent of airline tickets in the US are bought on the Net and more than 20 per cent of shares traded by personal investors - things that would have been unthinkable seven years ago when neither of the inventions that made this possible, the Worldwide Web and the browser, even existed.

But in investment, as in other aspects of life, nothing is forever. Quite suddenly a new fashion swept the markets - or rather an old one in new guise. Value came back. Shares of solid, if slightly boring, manufacturing companies recovered, and the hi-tech stocks slumped - most dramatically at the beginning of this week, when the main market in New York for such shares fell by 5 per cent in a day. Meanwhile, things like hotel shares boomed.

You can respond to this in one of two ways. The immediate explanation is that investment has long been, is now, and ever will be dominated by fads and fashions and they always end in tears. What we are seeing now is nothing new.

I am just rereading Michael Lewis's wonderful Liar's Poker, the story of Salomon Brothers in the 1980s, in which the fads were devices like junk (or high-interest, high-risk) bonds. American funds plunged into these - and half the US savings and loans industry (the equivalent of our building societies) nearly went bust and had to be bailed out by the American taxpayer.

For junk bonds, read Internet stocks. So we may be seeing the first twitches signalling that somewhere out there in the future will be the end of the Internet boom.

But don't hold your breath, for market manias tend to run on for much longer than anyone expects. When the end comes, a lot of people are going to lose a lot of money. But 'twas ever thus; meanwhile a different lot of people will have made their piles on the way up.

There is, however, an alternative response that you can make to this switch of sentiment that seems to be taking place. It is to say that if the old-fashioned ideas about value are starting to replace the new faddish ones about growth, that itself says something profound about the way financial markets will react to events over the next couple of years. Instead of being bright-eyed and bushy-tailed about every new investment story, they will become gimlet-eyed and flinty. If companies are doing well, they will rate their shares. But hope will not be enough: investors will want results.

If such a shift is taking place, this is fundamentally healthy. All our experience suggests that investment fashions go to extremes and the earlier they are checked by the advent of a different fashion, the better. But the switch is itself a time of danger, not just for American investors but for all of us here too. The problem is that there is not much room for error in the world economy.

Most people who follow these things will be aware that while the worlds' largest economy, the US, has been growing rapidly, the world's second largest, Japan, is in severe recession and the third largest, Germany, may be back in recession, too, if the figures for the first three months of this year are as bad as some fear.

You cannot, as the IMF reminded us yesterday, allow such a situation to go on indefinitely. This imbalance means that, some time soon, continental Europe and Japan will have to take over the baton of growth from the States.

Most people, including many who are supposed to know about such matters, are less aware of another imbalance in the world economy, the imbalance between this year and next. This year, demand is being boosted by company spending to fix the computer glitch known as the Millennium Bug. Next year it will be depressed by some disruption (we don't know how much) associated with failure to fix it. Estimates of this effect vary, but it is plausible at least that global economic activity this year has been boosted by around 0.3 per cent and that in the first half of next year the annual rate of growth will fall by nearly 1 per cent. That does not mean that growth will be negative - it means that it will run at 1 per cent less than it otherwise would have been.

To this, I think one has to add a further element: the psychological impact of the ending of the millennium. This year is going to be all right: it is party time. Next year, the party will be over.

How you measure that, explain it, justify it, I don't know. But I do know that US shares fell sharply around the turn of this century, reaching a peak in November 1899 and hitting a trough some 40 per cent lower the following summer. That, in itself, means nothing. The world is not so simple: history is not going to repeat itself in any precise way. But the experience of 100 years ago sets an historical context into which to fit what seems to be happening now.

The investment community would seem to be starting to make a fundamental reassessment of its aims and objectives. If it were really shifting emphasis from growth to value, it would signal a shift from optimism to realism. That is fine. The problem is when realism shades towards pessimism. There is no hint of that in the US at the moment, as any recent visitor would acknowledge. The place continues to buzz. But for how long?