The share offer will raise pounds 1

The share offer will raise pounds 1.4bn and values Old Mutual at just under pounds 4bn. OLD MUTUAL, South Africa's biggest insurer, said yesterday that it will offer its shares at 120 pence or 11.25 rand, when it floats on the London and Johannesburg stock exchanges today. But the rise in confidence for their own business was more modest, up from 59 per cent to 63 per cent.. Of these, almost three quarters (74 per cent) are planning to increase capital investment. Robert East, director of Barclays Corporate Services, said: "With three quarters of businesses saying investment was going into IT equipment there would appear to be an obvious link to the millennium."The bank's quarterly business trends survey found 60 per cent of the 600 finance directors were more optimistic about the future, compared with 49 per cent at the beginning of the year. More than four out of 10 businesses plan to increase capital investment, the same figure as at the start of the year. Spending to eliminate the threat of computer problems associated with the move into the year 2000 is the primary reason for the continued growth in capital investment, Barclays Bank said.

FEAR OF the impact that a millennium bug computer crash could have on their business has driven companies to channel three-quarters of capital investment into IT equipment, a report says today. For example, research by Phillips & Drew emphasises the fact that the growth of the US economy depends on share prices continuing to rise because the expansion is built on declining private saving.Capital gains make households feel rich enough to spend more than they earn, but without the gains they will stop. Without the economic growth, corporate profits will collapse, which could in turn trigger the Wall Street crash.The final verdict ought to go to one of the gurus of finance theory, however.Burton Malkiel, the Princeton professor who wrote the classic A Random Walk Down Wall Street, concluded last year: "I don't think it's possible for even the Almighty to know whether a market is over- or under-valued.". The equity risk premium is about as low as it has ever been and is unlikely to fall further.

It might rise, and anyway returns are likely to revert to their long-run trend, he concludes.Bigger pessimists take a different approach. This suggests that there is no real rationale for an equity risk premium at all. And since the late Fifties, when equity yields famously started to yield more than bonds instead of less, the case has strengthened. The risk of world war looks remote, communism has collapsed, policymakers have learnt how to react to financial crises, inflation is low and growth may be more stable than in the past.Demographic change could be helping too: if ageing western populations are saving more for their retirement there is higher demand for equities from investors.The trouble is that all these arguments must be true in order to explain why the apparent risk premium on US equities - although not shares elsewhere in the world - has dropped to zero.On cautious assumptions it is actually slightly negative.Michael Hughes, the head of strategy for ING Asset Management, says: "There will not necessarily be a crash but if you are a long term investor you will be better off elsewhere because you are not being paid anything at all to take equity risk."Mr Wadwhani was equally cautious in his paper.

Jeremy Siegel's research also established that, since 1802, equities have outperformed bonds more than two-thirds of the time over five-year holding periods and 99.4 per cent of the time over 30-year holding periods.Over one year, returns on equity are three times more volatile than returns on bonds but over 20 years slightly less volatile. The parallel is the 40-year bull run of the mid-19th century, he suggests.Optimists have another argument, namely that the equity risk premium required by investors has declined. Shares are not the most overvalued they have ever been by comparison with this long-run trend, but they are getting close.Jonathan Wilmot from CSFB notes in a recent report, however, that stockmarket disasters have always resulted from some external shock such as war, the Opec price shock, or the extended policy failures of the Thirties.Without another shock, real returns on equities will slow towards trend but may be able to sustain that trend for another 20 years or more. The same is true in the UK back into the 19th century, according to CSFB's Gilt-Equity study, and the bank has also confirmed it for Japan and Germany this century, although with dislocations like the hyperinflation of the Twenties in the latter case.Although there is no obvious theoretical reason why the number should be 7 per cent, the striking evidence suggests that any period of outperformance will be followed by a period of underperformance.With the compound rate of real returns on US shares over 13 per cent since 1982, this seems to indicate pessimism about Wall Street is well- founded.