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Brian Tora: Geo-political issues risk upsetting the apple cart

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August was not a bad month for investors. The S&P 500 Share index pushed through the 2,000 level for the first time right at the end of the month, bringing the rise to not far short of 4 per cent. Not a bad performance, given tanks rolling in eastern Ukraine and continuing bloody conflicts in the Middle East.

While the economic recovery seems secure – for the time being, at any rate – geo-political issues capable of upsetting the apple cart continue to lurk.

Quite what to make of this as an investor is far from clear. The good news is opinion seems divided, with those who believe the recovery in equities is well founded upon a stable economic background apparently in the ascendancy. In the opposite camp are those who consider markets have got too far ahead of themselves and are choosing to ignore the very real threats that could disrupt our current cosy situation. We will only know who is correct in the fullness of time.

The fact is  many of the apparently easy calls from an investment viewpoint have proved wrong. Short-dated government bonds on both sides of the Atlantic have delivered positive returns despite expectations that quantitative easing would stir up inflation and drive down the value of fixed-interest securities. It did not happen, so demand for the security offered by UK and US Treasuries kept prices up and yields down.

Indeed, it seems a great deal of conventional wisdom in the investment world has proved ineffective recently. 

Markets are considered to be vulnerable to uncertainty, yet despite risks abounding on a number of fronts, shares have by and large shrugged aside any concerns they may have had. 

Instead we seem to have adopted the stance that somehow we will muddle through. Well, we have in the past.

There may be other forces at work here though. With interest rates still very low in much of the developed world and inflation appearing less of a threat that many (including me) feared, shares look relatively attractive still.

Quite what a shift to a more normal interest structure – if anything can be called normal these days – is also hard to assess. The belief was that higher interest rates would simply signal greater confidence in our economic future and pose a threat to equity markets. Perhaps this is still the case but I do wonder.

The one area where interest rates could have an impact is on residential property. While much of the appreciation in value has been driven by a buoyant London market, the growing popularity of buy-to-let has helped house prices along. 

Once again this is a yield play, with returns available greater than cash and gilts – and generally more than sufficient to cover any mortgage costs.

It increasingly seems that interest rates will be at the core of market movements in the relatively near future. 

So far all the signs seem to be that the pressure to raise rates remains subdued although Bank of England minutes suggest a hardening of attitudes in some quarters. With wage inflation still muted, we may have to wait until after next year’s general election for a rate rise but I will be reading those minutes with increasing interest.

Brian Tora is an Associate with Investment Managers, JM Finn & Co

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