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A waiting game

It is never clear to me whether it is more likely to stand you in good financial stead by remaining a resolute cautionary bear or being an opportunistic gung-ho bull.

Caution is seldom ill-placed in making investment decisions. The trouble is when the gung-ho bulls are in the ascendancy, there is a tendency to feel you are missing out.

While committed to the equity market, I do have more cash in my portfolios than I have had for a while. The reason is that some correction is inevitable. There are a few worrying developments that might cause upset in the future. Inflation is one. True, the UK’s CPI did fall by more than had been expected last week but Mervyn King still sounded a warning.

Perhaps he had in mind what is going on in China. The Chinese producer price index published last week posted a 3.3 per cent rise which was up from 3.1 per cent on last month and was ahead of the consensus view. As a result, further tightening by the PBoC – China’s central bank – looks likely.

Any rise in export prices brought about by a dearer currency seems certain to be translated into higher prices across a variety of goods in this country, Europe and America. In other words, Mervyn King is right to signal that interest rates may rise further in the UK. The same may be true in the US despite what Bernanke said last week. In Europe, the situation is clearer. Trichet has all but told us that rates are going up in March.

The situation is hardly comparable with the 1990s when the retail price index was last at these levels, I still think these pressures should be moderate expectations. The trouble is that not only are the gung-ho bulls in the driving seat but there is also is a lot of money around to back them up. Not a small proportion of this rests with private equity houses. If ever a goose looked like laying a golden egg too many, it is these arcane companies. Such is their power that few firms are considered out of reach. But if the best businesses are absorbed, where are we poor, long-only investors to put our cash? Private equity funds? I have some exposure but there is a limit to what is prudent.

I am reduced to holding cash as a cushion against what I consider to be an inevitable market correction. The trouble is that I have no idea when it is likely to happen.

Alan Greenspan coined the phrase “irrational exuberance” three years before the US stockmarket peaked. Share prices almost doubled during this period. It all makes me feel humble and cautious. Perhaps I will just continue to watch and wait.

Brian Tora is principal of the Tora Partnership


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