Interview: Andrew Smithers of Smithers & Co

Andrew Smithers tells a joke about a parrot that decided to become an economist. When asked why, the parrot replied: “You only have to learn two words – supply and demand.”

Mr Smithers, an economist himself and founder of the consultancy Smithers & Co, is dismissive of the views of most industry experts, including investment banks, stockbrokers, financial journalists (whatever happened to getting the journalist on your side?), politicians and Alan Greenspan. But he thinks the parrot may be on to something. “I always think if you really understood those two words, you’d be an above-average economist,” he says, nodding sagely.

If this were the case, the experts would have understood why equity markets started to crumble in mid-2007, for example. It was not excessive valuations - equities had been expensive for some time. Instead, it was that they started to lose their biggest buyer: companies.

Mr Smithers believes one of the most significant drivers of returns during the last bull market was corporate demand for equity. Through acquisitions, privatisations, share buy-back programmes or simply speculation, companies pumped billions into the stock market, pushing up valuations irrespective of value.

It was this insight that allowed Mr Smithers to do that famously difficult thing – time the top of the market. “In 2006, we said markets were expensive but would continue to go up because this business of buying shares would continue to drive up markets. We changed our mind in 2007 because we saw what atrocious balance sheets companies had, and profits turning. It couldn’t go on,” he recalls.

This contrarian prescience at a time when Gordon Brown had called the end of boom and bust has earned Smithers & Co a reputation for delivering sound - and, above all, independent - advice. He says the company is “on a roll” in these times when faith in the usual information sources – investment banks and stockbrokers – has been severely shaken.

Smithers & Co’s business is to advise institutional investors – pension, mutual and sovereign wealth funds, among others – on asset allocation and other macroeconomic decisions. He says he tries to provide them with “research of the sort they don’t get elsewhere”. With a mysterious sense of euphemism, he adds: “One thing everyone agrees is they don’t know anyone else who gives them things like we do.”

More often, however, he does not bother to cloak his contempt for “elsewhere” in self-deprecation.

“Most financial pressmen and virtually all stockbrokers and investment banks trot out the most unbelievable rubbish about value. The main problem is that brokers believe if you tell someone the market is cheap, then it will go up. Obviously, cheap markets don’t necessarily go up and expensive markets don’t necessarily go down, otherwise they would never get cheap or expensive. The most essential thing to understand about value is it is not a good guide to the short-term market outlook,” he declares.