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Brian Tora: Will we see a marked fall in equities?

Brian Tora MM blog side

The surprise jump in inflation served as a reminder that there remain more uncertainties around than just America’s fiscal cliff and the ongoing European debt problem.

Europe did drift back into the headlines last week, though, with a series of demonstrations within the southern states against the continuing regime of austerity imposed by their northern neighbours. Even acquiescent Portugal, much praised for the measures undertaken to reduce debt, saw protesters on the streets.

But with CPI half a point higher and the Retail Prices Index returning to over 3 per cent, added pressures are being heaped upon a population already suffering under wage restraint and welfare cuts. Little wonder the Governor of the Bank of England was so downbeat in his assessment of our immediate economic future.

It was a positive pleasure to find myself out and about at various PFS events and opining on markets to advisers here at JM Finn.

With very nearly half a century of experience of the personal investment industry now tucked under my belt, I confess I am both amazed and concerned at the considerable progress that has been made. Amazed, because a degree of professionalism now exists amongst advisers and portfolio managers that would have been unthinkable a generation ago. Concerned, because I am not convinced that private investors have benefitted greatly as a result.

Of course, better understanding of financial and investment planning and tighter regulation must bring benefits. Expectations have been raised, though, and this at a time when markets are simply not playing ball. So the fact that those advisers I met at the PFS annual and regional conferences are now better equipped to serve the interests of their clients does not necessarily mean these clients are any better off.

Reflecting on this, I came across a report from Capital Economics suggesting the FTSE 100 Index would hit 5,000 before it reached 6,000. Given that it was standing at below 5,700 at the time of writing, this is not a particularly drastic move, albeit in the wrong direction. A fall of 12 per cent may not sound much, but it would do little for confidence and would bring the Footsie to a level nearly 30 per cent below the peak it achieved nearly 13 years ago.

The reasoning was the twin influences of an American slowdown – an inevitable consequence if the fiscal cliff is not averted – and continuing austerity and recession in Europe. All too understandable, given recent news, but with inflation running above trend, savers and investors need some protection against a rising cost of living. It all depends on whether these various disparate groups can reach some form of an accommodation.

Those fortunate enough to attend last week’s seminar at JM Finn’s London office will already know that I am by no means downbeat. In the end, agreement between those parties in Europe and America will have to be reached.

True, the rise in the cost of living was more to do with one-off influences, like higher tuition fees, and the continuing rise in food prices, something our government is unable to control, but rising inflation will help the debt problem.

And what is the overriding concern for investors today? Income – or, more correctly, rising income. This is simply not available from the overvalued government bond markets, where investors are lending money at negative returns. Indeed, if there is a bubble developing anywhere in financial markets, it may be you have to look no further than UK gilts or US Treasuries.

If the future is one of depression and deflation, then stuffing your savings into gilts is the only option. But if governments get their acts together and regenerate economic growth, these instruments will look over-priced. Unfortunately, all the training and professionalism in the world will not help you determine the right outcome.

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


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