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Brian Tora: Keeping an eye out for hidden dangers


Having survived October, that most capricious of months, we head towards the end of the year with equities in reasonably good heart, bonds encouraged by the postponement of tapering and economic performance picking up a notch. All well and good, but are there dangers lurking over the horizon that may yet upset the apple cart?

There always are, of course, but the trick is in spotting those that are easier to predict than the unexpected chance occurrence. In practice, such events should be priced into the market. The reality is that often they are not.

At present the biggest downside risk looks to be the petering out of the US recovery, but investors seem prepared to ignore this, given the ameliorating effects of the continuation
of monetary easing that would result.

However, back at home it is arguably the reverse of the American situation that could cause investors to pause and take stock. Such revisions as have taken place so far suggest that the UK economic recovery is even more robust than originally thought. Given that the forward guidance from the Bank of England is indicating a lower for longer approach to interest rate policy, more encouraging signs might demand a rethink.

But markets should surely take heart from an improving economic picture. Certainly, last week we saw the FTSE approach the highs attained in May, admittedly still shy of the December 1999 peak. Making progress from here might prove tougher, but is surely possible. I for one am hoping that 2014 will be the year when we break through previous highs, if we can’t manage it earlier.

There is little doubt that a feelgood factor is returning among consumers, helped in no small measure by the continuing strength of the housing market. The recent Nationwide house price index recorded the biggest rise for some time, albeit hardly a consistent picture across the country. London still leads, helped by foreign buying, while some regions are struggling to hold prices steady.

Still, emerging markets continue to divide opinion. Looking at the performance tables for the Investment Management Association’s global emerging markets sector, I was struck by the fact that not a single fund of the near 70 listed in the six months table had delivered a positive result, even on a total return basis. There are those opining that the flight from these markets has created an opportunity, while others point to the more difficult conditions they now face.

Could these burgeoning economies represent a risk to be factored into investment planning? On the face of it, probably not. In many respects the pullback in these markets has been healthy, as valuation levels were becoming stretched. This appeared particularly visible when subsidiaries of global companies enjoyed a local listing in a developing country, often enjoying ratings way above those of their larger, and arguably safer, parents.

Meanwhile, we live in an environment where short-termism appears to have travelled into economic management, with central banks poring over data before making decisions.

The shutdown in the US didn’t help, of course, with some crucial statistics delayed. Such has been the shock of the financial crisis to policymakers that they are in danger of over-engineering decisions and tuning too finely.

Being a glass half full type of person, I prefer not to let these concerns outweigh my growing belief that we are emerging from a torrid financial and economic time in far better shape than when we entered it.

I will try not to forget that markets do not move in a straight line and that upsets can and do occur, but the market’s confidence (at least, those markets making upwards progress) does not seem ill-placed. I just hope there is nothing I have overlooked.

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


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