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Muddle age crisis

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Conference calls between the leaders of Germany, France and Greece. President Obama offering advice to the EU and sending his Treasury secretary to lay down the law. Disappointing employment numbers here in the UK and electrical retailer Comet teetering on the brink of collapse. There is plenty to consider without taking into account a personally busy week.

It started with a lunch with PSigma’s Bill Mott. His UK income fund has been having a better time of it of late but he was pragmatically careful to avoid committing to a turning point. Perhaps inflexion point would be a better description, as it is these that provide Bill with triggers for developing new strategies for his portfolio. He is medium to long-term positive but accepts the next few weeks could still throw up some unpleasant surprises.

His core scenario - a 60 per cent probability, he feels - is for a low-growth, high-inflation muddle-through. The outside runners, with a 20 per cent chance attributed to each, is for a lost decade of low growth and low, or negative, inflation or for higher inflation with modest growth. The one thing he does not expect is a return to a boom economy.

But we are in the middle of an apparent run on French banks, with worries over their exposure to Greece. That they will take a big hit in the event of a default is not in question. What is in doubt is whether they can afford it. The Anglo-Saxon crisis of three years ago has turned into a European debacle, centred on inappropriate lending by French and German banks.

It so happened I was the markets guest for the BBC later that week, right in the middle of all the concern over French banks. Greece, to which French banks lent far too much, was the centre of attention but I was still surprised to be asked to comment following an interview with a Greek university professor. He was more concerned whether the Greek people will accept their unpalatable medicine.

The divide between how protesters against the austerity measures view the current situation and what is happening in the real world underlines Europe’s problems.

The issue remains how you persuade your electorate to accept a cut in their living standards when, so far as they are concerned, it is not their fault that debt is so high. Much the same conditions exist here, where trades unions are threatening a day of action.

And so the uncertainty persists, with supportive statements emerging from Merkel and Sarkozy but little in the way of outright positive action tabled.

This is what is frustrating America. It is concerned European contagion will cross the Atlantic and unseat its fragile financial recovery. But a united fiscal policy does not seem easy to achieve among a group of disparate nation states.

All of this came out in wide-ranging discussions about what it all means for investors, as a varied group of guests in the studios opined on a range of topics, French banks being just one. It is clear how attractive the muddle-through option must seem to Europe’s leaders.

The consequences of a default - even a managed one - is too dire to contemplate but the political will to carry through what is needed appears absent.

So we head into autumn with clouds still gathering on the horizon and little clarity as to what will eventually happen.

Perversely, it all makes the UK market look quite interesting. There are plenty of companies listed on the London market with truly international exposure and often they yield well, too. It increasingly feels like a market where value is the safest option.

Brian Tora is an associate with investment managers JM Finn & Co

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