Due to the unification process in Europe, member countries' debt-reduction policies will affect the demand for capital. At the same time, the 'baby boom' generation is entering the 45-65 age bracket, where saving levels are at their highest. The balance between the supply and demand of capital generates a trend towards lower real interest rates, no doubt below the rhythm of economic growth.

Such a reduction in real interest rates reduces the opportunity cost of holding risk capital. In addition, on a single market controlled by an independent central bank, the risk of inflationary deviation can be kept under better control. In this way, uncertainty as to future inflation is being reduced, as is the expected volatility of growth. If uncertainty and volatility reduce, the premium over basic money market rates demanded by risk capital will reduce proportionally.

But Asia, representing a quarter of the world, is sinking into depression, with opaque and unfathomable pros-pects. The stock market boom on both sides of the Atlantic, is leading to p/e ratios of 25.5 in Europe and 24 in the US. And these figures presuppose that profits per share will grow in 1998, according to the consensus, by 6.6% in the US and 20.6% in Europe, despite repeated downward revisions. But the fact is that national products will rise by scarcely 4-4.5% at current prices. How can one justify these sort of multiples, except by boldly postulating that profits will continue for another two or three years to grow two or three times as fast as national income?

The fact is that the reduction in industrial prices is becoming generalised. Expressed in US dollars, raw materials have fallen by 4.9% over six months and by more than 6.9% over a 12-month period in Belgian francs. In six months the export price of steel has fallen by 12%, that of zinc by 8.5%, that of glass by 4.3%. The global industrial price index is half what it was last economic peak in 1989.

Consumer prices, which continue to be buoyed by the structural increase in the cost of services, are unlikely to rise by more than 1.5% in continental Eur-ope by more than 2% at most over the next 12 months in the US. This means that interest rates are a lot less in real terms than their nominal level might lead us to believe. This is the monetary illusion of stock market operators who believe that they can justify record p/e ratios by low interest rates.

It is difficult to resist the temptations produced by the current monetary euphoria, ie to allow the proportion of portfolios invested in shares increase due to the simple fact of the relative price rise, worse still, to increase this proportion deliberately in view of the spectacular performance of the past 18 months. However, when risk looks prospectively less well remunerated, it is not a good idea to go looking for it.

Vincent Planche is head of institutional asset management at Banque Degroof in Brussels

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