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Brian Tora: Euro continues to obscure investment outlook

The razzamatazz associated with the London Olympics provides a stark contrast to some of the other news percolating through this summer.

The recession has got deeper, according to the first pass at GDP figures released last week. And Europe remains in the spotlight, with Spanish bond yields breaking through the 7 per cent barrier. Not only that but German patience appears to be running out. Who knows what the future might have in store?

Certainly, what might be happening in Europe continues to drive sentiment in markets. Fears that Germany might pull the rug out from beneath Greece, coupled with concerns over both Italy and Spain – the latter being close, it seemed, to needing a full-blown bailout – drove share prices lower. But such is the optimistic nature of investors that the European Central Bank stating that it would do whatever was necessary to save the euro was enough to encourage buying again. Or, more likely, short covering.

A couple of weeks ago I was driving through France and Spain on my way to Portugal. The holiday season was just getting into the swing of things. Much seemed normal, with Fench motorways full of south-heading traffic and hotels turning away potential punters without the requisite advance booking. Spain was quieter, with roads bereft of cars and lorries but towns and cities still feeling busy and buoyant. Portugal was another matter entirely, though.

Through the Alentejo region I passed numerous bridges half-constructed to improve traffic conditions but now abandoned, with the cash simply not available to complete projects set in motion in more carefree times. In Lagos, a bridge – closed earlier during the year for repairs remained out of bounds, with the regional government admitting it simply did not have the money to make it safe. These are difficult times in the cash-strapped eurozone.

It is boring to hark on about the crucial role the future wellbeing of the eurozone holds when it comes to trying to assess what might be in store for investors – boring, but regrettably necessary.

Presently, it feels as though markets are stuck in a Groundhog Day round of repetitive conditions that keep shares trading within a limited range. If it all turns sour, then the bear market resumes its grip on sentiment. If a way is found through this seemingly intractable problem, perhaps we can re-challenge earlier highs.

It is the politics of the situation that is rendering a definitive solution so difficult to achieve.

German politicians probably understand full well that a collapse of the single currency will result in a massive cost being borne by its taxpayers. The taxpayers themselves are likely to have a different viewpoint. And politicians, being keen to be re-elected, will doubtless bear the attitude of those capable of casting votes in mind. There is no easy or swift resolution to this problem.

Meanwhile, corporate news continues to surprise on the upside. Some major components of the FTSE 100 index from a diverse range of industries have been reporting recently.

While it has not been unalloyed joy, the tendency has been to confound the pessimists. What this suggests to me is that business leaders are better able to react to changing conditions than politicians. Sadly, history tells us that these two cultures seldom engage in a satisfactory manner.

So I fear this will continue to be a summer as capricious for the markets as it has been for the weather. With the Olympics well underway, I do welcome the distraction. Investing is never easy. Right now, it feels as tough as I have ever known when it comes to determining how best to organise your financial assets.

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


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