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Brian Tora: Who will lose out when QE stops?

Brian Tora MM blog side

Frustratingly, Europe seems incapable of remaining out of the picture for long. A general strike in Greece, an austerity budget in Spain – and the more financially secure northern eurozone countries apparently deciding that a banking union is not such a good idea after all. It all adds up to more confusion and uncertainty. Yet markets, after an initial wobble, regained their composure.

There has been some good news.

Our own economic performance has not been quite as dire as originally feared. True, we are still in negative territory, but the contraction of the UK economy was only a little over half of what was originally reported.

That is the trouble with statistics. They are almost invariably amended after the initial pass but that does not prevent markets reacting to the information put in front of them at the time.

So what are poor investors and their advisers to do?

A number of portfolio managers of my acquaintance have been quietly accumulating European shares, presumably on the basis that things cannot get any worse. But most European bourses have had a torrid time during the Sovereign debt crisis. This tentative optimism may prove well timed but it could all still go horribly wrong.

Meanwhile, on the other side of the world, China continues to slow, unsettling investors. The Chinese government is even employing its own version of quantitative easing.

The real issue is what implications this might have for the commodities sector. Clearly, the easy money has been made but as the emerging world continues to play catch up with those of us in developed nations, it is hard to imagine recent trends being fully reversed.

But mining companies will need to improve efficiencies if they are to continue to prosper. The problem with the China fuelled commodities boom that was ushered in at the time the new millennium started was that anyone with a hole in the ground could not fail but make money.

There is still plenty to play for but choosing the winners will become a more testing exercise in the future.

Indeed, market conditions are presently such that simple buy and hold strategies no longer appear appropriate. Potential outcomes are clouded by the likely interference of policy makers, making forecasting an even trickier business than usual.

Even apparent winners in the corporate sector are capable of being overtaken by events. Perhaps this is a case for the smaller, nimbler funds but I would not even bank on that these days.

One problem I and many other investment commentators and fund managers face is the sheer proliferation of information.

Just as investors were likely to react to the second-quarter GDP figures, even knowing there was every chance of a revision at a later stage, so it can be difficult to see the wood from the trees when you are assaulted with a barrage of statistics and opinions on a seemingly hourly basis. That this tells me nobody knows what might happen I find comforting.

But there are some strands to pick up which could provide pointers to the future.

There is plenty of money around if you know where to look. Perhaps this has resulted from the aggressive quantitative easing programme adopted by central banks, in which case it will at some stage disappear.

The last time I recall something similar taking place was when the Fed first pumped money into the system to stave off a cash shortage as the new millennium arrived and then withdrew it swiftly.

The beneficiaries of this pump priming were the new technology companies, which found cash showered on them as they made their extravagant claims.

The losers, when it was recalled by the Fed, were the investors who had come to believe that technology was a one-way street. There will be losers when QE is finally abandoned but who they will be is not immediately apparent.

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

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