DBR Investments Ltd has confirmed its research findings for 2005, as published in this newspaper (January 1). These have been fulfilled beyond all expectations. Recent research indicates that a long-term bet on the present buoyancy of the world stock markets may disappoint.

These include the Malta Stock Exchange, but not to the same extent as this has exceptional characteristics, not least among them being that it is a thin market, where thousands and not millions participate. It is also highly concentrated, giving a disproportionate chance to a winner who takes all.

For the past year the world market and the MSE have enjoyed exceptional returns. These lead us to conclude that the prospects for such returns cannot last forever.

The exceptional surge in the market has been due more to psychological and monetary reasons than for any change in the fundamental structure of the world economy. The acceptance of the healthy phenomenon of globalisation itself by world markets having more of a psychological and political underpinning than an economic one.

Are the world's moneymen prepared to co-operate or are they returning to the disastrous beggar-my-neighbour policies of competitive devaluations, which so harmed the world economies in the Thirties and contributed directly to the Second World War?

A sign that the world economy is entering a dangerous phase is that the phenomenon of globalisation is being seriously challenged by new psychological, economic and political outlooks. Globalisation, as every O-level student of economics will instantly recognise, is nothing but Ricardo's theory of comparative advantage writ on a worldwide scenario.

It ultimately depends on the will of politicians. Chinese and Indian workers have multiplied the world's workforce by four times, frightening many trade union leaders in the West. It is folly for the United States and the European Union not to tap this bonanza of cheap, intelligent labour.

Economic history has shown us that the West has been leading in scientific innovation and bank organisation for the last century. It can trade its brains for the brawn of Asia. The West has led on the Internet and will lead in everything else. General Motors in the US is reducing its hourly wage rate from $25 to $12 an hour.

An example of an EU banking market that has lost contact with the fundamentals of the economy is the Italian one. Bank consolidation makes a lot of sense in that country for its bank charges are too high. Bank share prices, consequently, are overshooting in a spectacular way in the hope of better dividends brought about by consolidation.

The Italian economy barely grew in 2005 while a bank like Monte dei Paschi di Siena has advanced by more than 100 per cent. The Italian bank share bonanza identified by DBR about a year ago is a sign of psychological health, but hardly of immediate economic productivity.

More bank consolidation in Germany, Italy and the UK is beneficial to this consumer but the extraordinary profitable speculative money making opportunity cannot last for ever.

The short view

We have spoken at length about how economic research indicates that it is a mistake to take a long-term bet on the present buoyancy of the world stock markets. In the long term their downturn seems to be inevitable as excesses provoke a reaction, but the short-term view is by no means all that clear.

J.P. Morgan, the great investment bank, is unconcerned. It argued last week that "we are far from predicting a repeat of the excess of the late Nineties". A sound reason for optimism when taking the short view is that monetary policy in both the US and the EU has, for the past five years, been managed with extraordinary ability.

The US has been able to absorb, without undue inflationary pressures, the rise in oil prices in spite of their dramatic leap upwards. In that country, equities are cheap relative to financing costs. This is thanks to a succession of financial wizards at the Federal Reserve Bank (the US central bank), namely Alan Greenspan and Ben Bernanke, Wall Street cannot be expected to pull the world into downturn while this condition lasts.

The ECB's creation of a strong euro, and its regard of M3, a broad money supply measure, as a useful indication of long-term inflation trends, is proving a winner on a worldwide scale. EU monetary policy is exceptionally successful among that of the leading world central banks.

The ECB has started raising its main interest rate in recent months and analysts expect another quarter percentage point raise in May or June.

The Malta Stock Exchange has benefited enormously from the climb of the euro in international prestige. The Malta lira is 100% pegged to the euro, and as if this was not enough, our currency is 100% backed by hard currencies, far beyond the legal 60% minimum.

The Malta lira backed by the euro has made the short-term prospects of the MSE and the real estate market look extremely good. So their brilliant short-term performance should not surprise anybody. The long-term performance of the Maltese economy is much more of a matter of doubt. There have been 44 years of its macro-economic management. It amounts to a great success story when a summation is made of all that happened, but there have been moments when disaster threatened.

In this DBR monitoring article we have hoped to demonstrate that the short-term expectations of investment are excellent, the long-term ones being much less so, but John Maynard Keynes after all stated "in the long run we are all dead".

The dollar, gold and silver

Much is speculated about the dollar every day and night but one fact stands out: the external dependence of the financing of the US trade deficit, which at the moment runs to about 7%. This is the major element in the globalisation of the world economy.

It is simply without precedent in international finance, and for which a textbook solution is not available. On February 6 of last year DBR Investments declared: "Gold is back - 25 years after it peaked. The dollar is down - 20 years after it fell. The January 1 article stated: "Gold is back not only as a precious metal to decorate beautiful women and men, but it has also regained its monetary function.

"The dollar, in spite of an unexpected recovery, is slowly on the way out as a world monetary reserve currency. Central banks have stopped their sales of gold."

China has been buying a lot of America's debt, and America's publicly stated policy is for China to revalue its currency upwards. This amounts no less than to a publicly stated Federal Reserve policy to revalue the dollar downwards.

The low savings rate in the US is making it possible for that country to have an enormous economic multiplier feeding the world's most consumer hungry population. In economics, the greater the consumption, the higher the multiplier.

This has resulted in the whole world having a dim prospect of the destiny of the dollar as a world currency. Sterling was the world's medium of exchange when the UK had a trade surplus; it gradually lost that position when that surplus became a deficit. It however lingered on in its reserve currency situation many years after economic facts had failed to justify its privileged position.

When a country has a reserve currency, profits accrue to that country through others having to use its currency to finance their trade. At the present time the dollar is down but by no means out. The present period is definitely one of transition with the euro making giant steps forward, despite attacks being made on it by the prestigious American Enterprise Institute, which went so far as to impute that Italy would be following Argentina down the same road to ruin because it had adopted the euro, thus foregoing its old beggar-my-neighbour policy of devaluations.

The US is by no means pleased to see itself losing the highly rewarding role of world financial leadership. But no country can have its cake and eat it, even the US. The world's suspicions bedevil America's approach to Iran, and feels whether rightly or wrongly that Bush sees diplomacy as a tedious precursor to military action.

These circumstances do no good to the dollar, although the US is the world's leader in scientific innovation. It provides the best of excuses to those who see in gold the best hedge to troubles unleashed by self-motivating terrorists fighting an unimaginative American foreign policy.

It explains the present buoyancy of the gold price, and the fact that the price of silver is catching up with it. Silver has risen by more than 20% this year after an excellent 2005. It is experiencing the biggest jumps since Bunker Hunt tried to corner this market in 1979.

Bill Gates was the biggest winner in the silver game this time round. It is recording the highest prices in 23 years, pushed forward by the proposed launch of a silver-backed exchange traded fund that is expected to make it easier to gain exposure to the metal.

On February 12 DBR Investments' researched silver article showed the strong possibility of a significant increase in the price of silver. That re-search has been more than fulfilled in the intervening period.

Gold and silver form an integral past of the commodities boom, which has been going on for three years, and probably has another seven years to go. It reverses the trend of the last 20 years.

Gold and silver prices help us track the price of copper, which is behind the stupendous boom of BHP Billiton, the Australian mining company, which we researched last year and brought to the highly profitable attention of the alert section of the Malta investing public.

A globalised Nokia

On January 1 we referred to the Nokia articles (The Sunday Times, July 31 and November 13, 2005), which were a DBR Investments research success story. Nokia had advanced about 21% during that period, and it shows every sign of continuing that advance for it has established itself as one of the world's first globalised companies, in that its share price depends on the world market, and especially on the Chinese market, for its value.

Nokia has beaten the Chinese in the sales and design of a low cost mobile telephone. Its China sales are expected this year to grow by 77%. It is ahead of Motorola and Samsung in the growth of its share of the world mobile market, of which it has 35%.

DBR's research articles on ST Microelectronics have been quite as accurate. The STM share price shadows that of Nokia, which it supplies with semi-conductors. During the past year STM has increased its share price by 50%, but recently the gap between it and Nokia has been widening.

The MSE

The MSE is being moved forward thanks to two great factors: the strength of the Malta lira and the expected reasonable returns of privatisation.

The present government has set in motion the privatisation game and has thus let the economic genie out of the bottle. It has also encouraged Malta to look towards Europe.

This turn of events has unleashed vast energies in the Maltese psyche, which received their best expression in the exciting utterances of a man who has become more Maltese than the Maltese themselves, namely Shawn Wallis, chief executive of HSBC in Malta. HSBC Malta is doing better than its London counterparts; it is earning a return on equity (RoE) of 26%.

Italian banks

Maltese investors are probably missing a great opportunity in the extraordinary present consolidation process of Italian banks. This was brilliantly followed and massively influenced by the Financial Times in its successful effort to unseat Antonio Fazio as governor of the Bank of Italy.

This bank investment opportunity was pointed out by DBR Investments as long as a year ago. Dr Victor Ragonesi also made a remarkable local press contribution to the Fazio story.

DBR Investments reports another successful three months of research from its Sliema office. It is pleased to serve the whole country and not just itself. It had no crystal ball, and no extraordinary intelligence. The quality of its research is owed just to hard work, and profitable enjoyment in its performance.

This article is not intended as investment advice, but aims to help produce an investment culture. John Azzopardi Vella has promoted the Malta Development Fund and advised S&P. He is currently research economist at DBR Investments Ltd. E-mail: johnazzopardivella@hotmail.com