By John Heinzl
The Globe And Mail
Globe Investor Section
Saturday, January 10, 2004

Corporate fraud and accounting scandals have shaken investors' faith in capital markets, causing many to stay on the sidelines, according to a Globe Investor survey.

Two-thirds of respondents said cases of fraud and unethical behaviour have "disillusioned me somewhat", while 10 per cent said scandals have "soured me to the point where I plan to invest less in stocks and equity funds."

Respondents also expressed little confidence that securities regulators will protect their investments from fraud and unethical practices. More than one-third said they have only "weak" confidence, while 18 per cent said they have "no confidence at all."

Just 5 per cent said their confidence was "strong" and 40 per cent answered "moderate."

Investors are also skeptical of brokerage firm research, with 17 per cent dismissing it as "interesting trivia, but of little use," 8 per cent calling it "unreliable and inaccurate," and 15 per cent deeming it "tainted, because their firms do business with the companies that issued the stock." A little more than half said it was "somewhat useful, but not always reliable."

Despite the rebound in stock markets over the past year, the survey results indicate investors remain wary of jumping back into equities with both feet.

"People are still sitting on the sidelines and are not totally convinced yet," said Tom Flanagan, president and chief operating officer of BMO InvestorLine in Toronto.

Data for the discount brokerage industry bear that out. As of Sept. 30, 2003, 12.8 per cent of the industry's $122.9-billion in assets was sitting in cash, according to Investor Economics. That compares with less than 10 per cent in late 1999 and early 2000, when stock markets were at their peak.

Investors who are wading back into stocks are researching their picks carefully, Mr. Flanagan added. To meet investors' growing appetite for corporate news and research, "we're trying to provide an awful lot of information to our clients," he said.

Others say investors tend to shrug off scandals as long as stocks are rising and everyone is making money. Markets are coming off gains of more than 20 per cent last year, which has repaired some of the damage that portfolios suffered during the bear market.

Although survey respondents expressed considerable cynicism, "what people say and what people actually do are two different things," said Adrian Mastracci, president of KCM Wealth Management in Vancouver.

"Yes, there is concern, but do I see them going to the sidelines and saying, 'I'm not investing another dime in the markets'? No, I don't. The reality is they are investing in stocks and mutual funds."

"The latest run has gone a long way to overcoming people's fears."

Eric Roseman, president of ENR Asset Management in Montreal, agreed that small investors are getting back into the markets. He can tell from the chatter of people at his gym.

"A lot of them were bragging about their big picks in . . . tech stocks in the late 90s," he said. "Now, they're all bragging about Nortel having doubled and they bought it at $2. Of course, a lot of them won't tell you they owned Nortel at $100."

Far from being too cautious, investors have become overly bullish and may be setting themselves up for a tumble, said Mr. Roseman, who believes the recent upturn was a bear market rally.

Stocks could continue rising in 2004 in advance of November's U.S. presidential election, but after that "there's going to be some hell to pay", he said, citing the soaring U.S. budget deficit and heavy selling by corporate insiders who are "getting out while the getting is still good."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.