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Cold comfort

Sitting in a broad-casting studio last week, preparing to pronounce on the likely cancellation of the meeting of European finance ministers to rubberstamp the Greek bailout package, an interesting snippet emerged from one of the other contributors.

Around €36bn has been withdrawn from Greek banks in the past year, equivalent to 20 per cent of Greek gross domestic product – perhaps more, given that its economy contracted by 7 per cent during the last quarter of 2011.

Perhaps by now Greece has already been forced into default and an ignominious exit from the euro. My money remains on a way through being found, though, which was certainly the approach the market appeared to be taking last week.

Rather perversely, the more encouraging the news emerging from Brussels, the more nervous markets become. Efficient markets? I sometimes wonder.

What does all this mean for investors? I find myself looking back to some presentations I attended more than a decade ago. A fund manager at the firm for which I then worked made much of research conducted on the likely effects of the retirement of the baby-boomer generation in the US.

His contention was that equity markets would have a good run until now, as it happens. How wrong can you be?

He believed that in the run-up to retirement, this post-war generation would save hard – which would be good for the markets – in preparation for ceasing employment. Then the tax-take would fall, making life difficult for governments, while retirement pots would be steadily spent – which would be bad for markets.

At the time, he could not have known that the war against terror would create uncertainty or that the credit crunch would undermine capitalism.

Then, the euro had only just been introduced and those who hailed it as the way forward for Europe tended to be outnumbered by the sceptics who believed it was bound to fail.

We know now that it was flawed in its conception but it is so core to the workings of the European Union that every effort must be made to ensure its survival, if not its integrity.

All this serves to highlight the dilemma for politicians and, consequently, for investors. Instead of saving for retirement as my former colleague predicted, people in the developed world gorged themselves on a debt-fuelled spending spree, which nicely drove economic progress.

The demographics are now moving against us, so we will increasingly rely on the developing world to supply the demand that is being stifled to allow for the debt mountain to be reduced.

Not a comfortable picture but not necessarily one that will be bad for shares. What is clear is that monetary policymakers have less influence over the course of inflation than was previously the case.

Last week’s inflation numbers from the UK were tolerably predictable, knowing as we did that last year’s VAT hike would fall out of the picture, so raising interest rates to curb inflationary pressures would probably have little effect, other than to depress further economic performance.

For the foreseeable future, we can expect interest rates to remain low and inflation to persist at rates above the Government’s target. Underlying price rises are continuing, driven by the growth in emerging markets.

Western governments will be constrained in reducing taxes by the changing demographic pattern while companies will increasingly seek to serve the growing affluent emerging world.

It still sounds like a case for equities, in my view, although markets do not move in a straight line and, after a 20 per cent rise, I would not rule out a spate of profit-taking.

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

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