City expert reviews shares outlook

Can stock market investors expect better times ahead?

Julian Knight BBC News Online personal finance reporter

The bear market has been in full swing for more than two years. We asked Sandy Fleming manager of the F&C smaller companies fund, if he saw light at the end of the tunnel for stock market and pension investors.

What do you think are the prospects for the UK stock market over the next year?

I am positive about the medium term prospects for the market.

Over the last two years we have seen a significant reduction in investor expectations and share prices are roughly where they ought to be.

The deterioration of pensions isn't something that's happened overnight

Admittedly, short term the market is being buffeted but it's hard to see how it can go much lower than it has in recent months.

However, having said that, markets went through fair value on the way up so it's safe to assume they will go through fair value on the way down.

What would the likely effects be of war with Iraq on the UK stock market?

Historically war has been quite good for stock markets once the initial shock is out of the way.

Sandy Fleming fund manager

In fact, most in the City would be surprised if there isn't war with Iraq at some stage.

A short war with Iraq has already been factored into the share price of many companies.

If war is conducted with the blessing of the United Nations then I think it should be over quickly.

However, if war drags on then the reaction of the wider Islamic world will be a major investment worry.

As a former manager of the Unilever pension fund what way do you see out of the pension crisis?

The deterioration of pensions isn't something that's happened overnight.

Unfortunately decisions were taken when markets were rising- such as companies being allowed to take payment holidays - which are having an impact now.

When enough people believe that enough companies are attractively priced then stockmarket investment will kick in and the markets will turn

The most extreme measure would be the forced introduction of compulsory employer pension schemes.

Long term there is the possibility that the state pension will become means tested.

The message has to be communicated that unless people save for their retirement they won't have a pension.

Has stockmarket investment had its day?

Only someone that holds the view that capitalism is coming to end can believe that stockmarkets will not recover.

Back in the bear market of the early 1970s it seemed as if capitalism could be on its last legs.

In the UK we had double-digit interest rates and inflation above 20%.

However, nowadays the situation is much different, we have seen a valuation adjustment not a world economic crisis.

When enough people believe that enough companies are attractively priced then stockmarket investment will kick in and the markets will turn.

Fund mangers are paid to outperform the stockmarket but many have failed to do so. How do you answer those that suggest people would be better off investing in tracker funds?

Three years ago I would have found it difficult to justify the performance of fund managers.

Back then after the longest bull market in history many tracker funds - which simply buy shares in all companies quoted in the FTSE - had outperformed those where a manager calls the shots.

However, the bear market has underlined a key flaw in funds that track the index.

As markets fall funds that track them are a one way ticket down.

In addition, tracker funds are duty bound to buy when a company comes to the market.

Unfortunately, in recent years many new entrants to the FTSE have subsequently lost value.

Fund managers can pick the cream of the crop.

There are lots of good fund managers that consistently best trackers on both the market upside and downside.