Brian Tora's Investment View
There has been much to take in over the past week. Aside from the Chancellor’s autumn statement, which delivered no surprises, we have seen bond yields in Italy rocket to 8 per cent, European finance ministers meeting to little effect and a sobering statement on the state of the UK economy from the Office of Budget Responsibility.
Yet shares held remarkably steady. Indeed, in the middle of last week, they staged a recovery that all but restored index levels to where they were before the recent slide started.
The catalyst was the announcement that a group of the most powerful central banks will co-ordinate lending to the commercial banks to head off another liquidity crunch. The rationale is that banks have become too cautious, prefer-ring to deposit surplus cash with central banks rather than each other. But it implies that perhaps a bank or two has become short of cash.
Whatever the real reason, it resulted in one of the best days for the FTSE 100 for some time. US and Asian markets respon-ded favourably, too, and borrowing rates fell for those European nations seen to be at greatest risk such as Italy. Early profit-taking the following morning was swiftly reversed. Could this be a turning point?
We are far from being out of the woods as far as Europe is concerned but to see the UK, Canada, Japan, the US, Switzerland and the eurozone act in a concerted manner demonstrated how seriously world leaders are taking the situation and brought some comfort to investors.
The day before this announcement I had been hosting a webcast, in which fund managers from Aberdeen, Skandia and Threadneedle took part.
With bond and equity managers present, not to mention Skandia head of asset allocation Rupert Watson, a lively debate ensued on investing for income. Watson painted a bleak picture of what might ensue if Greece withdraws from the single European currency zone but, like the others, he considers longer-term prospects are encouraging.
The need for a resolution in Europe, a soft landing in China and the US maintaining its pull out of recession will continue to weigh on investor sentiment in the short term but perhaps in a year’s time we might look back at the present uncertainty and wonder why we were so concerned.
There is an encouraging lack of consensus over likely outcomes. One eminent investment house puts its backing behind growth stocks, another equally credible commentator believes value is the way forward. This latter approach resonates with me. With bank interest so low and UK government bonds delivering negative returns, adjusted for inflation, the yields on some quality domestic companies are enticing.
As for foreign shores, there are those that consider the risk-off attitude that has resulted in emerging markets coming under selling pressure has thrown up considerable opportunity. Others point to major uncertainties that remain around less politically stable areas, particularly in the Middle East. Geopolitical events could still upset the apple cart but if you want a feel for the direction in which the market would like to travel, remember what happened last week on the central bank announcement. We need more days like that.
Brian Tora is an associate with investment managers JM Finn & Co