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It takes two to tango

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The sudden blossoming of spring-like conditions has spilt over into the stock market. The FTSE 100 index has regained 6,000 and even Portugal throwing in the towel and requesting a bailout has failed to dent confidence. And all this despite the Japanese nuclear reactor problem trundling on and little sign of a resolution in Libya.

Not all markets are behaving in the same fashion. Overall, we are up by a modest 2 per cent since the beginning of the year. In contrast, Russia was 18 per cent higher by the middle of last week.

Unsurprisingly, the tail end of the main market was Japan, although the total fall, at not much more than 6 per cent, was rather less than one might have imagined, given the extreme volatility that set in after the earthquake and tsunami.

There is a perception that smaller companies have been leading the way recently, although they have struggled in 2011. The UK’s Aim market is down by around 2 per cent so far this year but, looking back a full 12 months, the gain is more than 28 per cent – a rather better performance than the FTSE 100, which is less than 5 per cent higher. If ever there was a barometer for risk appetite, it must be smaller companies.

Again, Russia looks to have been one of the best-performing markets on a one-year view, up by nearly 30 per cent, while Japan is 15 per cent down on a year ago.

Some other markets also stand out. Germany has risen twice as far as our own main market since the start of this year and is around 15 per cent higher over the past 12 months.

China, on the other hand, has fallen by nearly 5 per cent over the same period, despite being up by 7 per cent since the start of the year.

It all goes to show that taking an international approach to investing can pay dividends. Remember, these performance figures are in market-index terms. Bearing in mind the poor recent performance of sterling, the benefit for a UK investor is likely to have been greater. Even the losses sustained in Japan would have been lessened as a consequence but currencies do not all move together these days.

And we must not forget that bastion of capitalism, the US. The Dow Jones Industrial Average is up by more than 7 per cent so far this year and even the more representative S&P 500 index posted a gain of more than 6 per cent. Look back a full year and the gains translate into 14 per cent and 13 per cent respectively.

As for the effect of currency fluctuations, the dollar actually fell against the pound over the year – not by a great deal but enough to trim any profits made.

It is impossible to make a considered judgement on the likely direction of markets from a solely domestic viewpoint these days. What happens on the other side of the world may well have implications for share prices at home.

Given the boost that resource stocks have had, it is a little surprising that our own main index has not achieved better results, given the number of multinational stocks listed in London.

Perhaps the UK is due a period of catch-up. One market-watcher of my acquaintance has been dripping cash into shares.

His view is not entirely rational. He “feels” the market will trend higher. And there I was reading the musings of a leading economist who warns of a correction imminent – not just here but around the world. Oh well, it takes two to make a market.

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

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