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Bank bounce

Iwas addressing the first of the Association of Investment Companies’ private investor roadshows last week. In a week where much of the news has been downright gloomy, it gave me a spark of hope.

The venue was central London, perhapsnot the most representative place to takethe temperature of the investing public.

There were no signs of panic among the well groomed burghers of Westminsterand Mayfair. A little caution, perhaps,but a generally held belief that we would somehow pull through all this financial turmoil was clearly present. Mind you,these were not borrowers. More than one attendee remarked that they were holding their cash deposits at several banks,just to be on the safe side.

As for the managers, they were more upbeat than I had expected. I know they can hardly rubbish the concept of equity investment but one at least owned up to having raised gearing on the back of the shakeout in shares. And what was the most popular choice for the sector most likely to deliver superior returns to the adventurous investor? Why, private equity, of course.

Yet sitting in a radio studio the following day, pondering what to make of the news of the moment, conditions appeared anything but sweetness and light. Alliance & Leicester owned up to tough conditions in the mortgage market. It may not have been as exposed as Northern Rock but you cannot help but wonder what will happen to it asthe loans it has negotiated to finance its mortgage book mature later this year.

Barclays disclosed it was weathering its storm reasonably well and even raised the dividend. Given the way that bank shares have been slammed over the past six months or so, you have to wonder whether Bill Mottis right in his contention that real value is emerging in this and other suffering sectors.

But the US is looking horrid. A recession is unavoidable in the opinion of many observers and even the Fed has reined back its expectations for economic growth for the next few years. Inflationary pressures continue to build, so the room to manoeuvre in monetary easing may be curtailed fora little while. No wonder stagflation isbeing referred to so often these days.

We have been here before, of course, back in the 1970s. It was an uncomfortable period but some would say it had some useful side-effects. Debt, for example, is devalued during a period of high inflation but servicing it costs more. This will be a difficult trade-offfor central banks to manage but the signsare they are going to try.

Perhaps the investor on the Clapham omnibus has it right. It is too late to panic and a better strategy is to be opportunistic – like those fund managers bottom-fishing sectors that have been slammed in the credit crunch. But credit problems are likely to remain with us for some time, so do not expect an early reversal and be prepared for a bumpy ride.

Brian Tora (brian.tora@centaur.co.uk)is principal of The Tora Partnership

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