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Danger of shrinkage

Last week I returned from Madeira. I like Madeira. It is pretty, not too hot and has close links with Britain.

It is also suffering visibly from the global economic slowdown. While a significant factor in the drop-off in visitors from the UK will be the rise in the euro, there can be little doubt that fewer holidaymakers are arriving from everywhere.

Indeed, while I was there, one of the smartest and best known hotels on the island – the Savoy – closed. True, closure for a revamp had been on the cards for some time but no timetable appears to have been set for the refurbishment works and most staff have been laid off, causing quite a furore in the local community.

I mention this because one of the first pieces of economic data to hit my desk on my return was the news that the world’s second-largest economy, Japan, is shrinking at an alarming rate. Yet shares remained remarkably buoyant while I was away. Far from dropping below 4,000 again, as I hinted it would a few weeks ago, the rally in the FTSE 100 index approached 30 per cent last week.

Markets rebound before economic activity but I wonder whether shares are now getting ahead of events.

Things appear to have stopped getting worse but there is no sign conditions are improving. Oil, for example, has bounced from under $40 to over $60 but was close to $150 not so long ago and apparently there are real problems over storage as supply is currently outstripping demand.

Unemployment, too, is rising all around the world. In the first quarter of this year it rose here by 250,000 to top 7 per cent, although still low by European standards. But businesses are still failing and cost-cutting is leading to more lay-offs. We have probably not seen the bottom in our domestic economy yet.

I am still delaying my proposed purchases but I am revising upward my views of how far any profit-taking will go. Confidence is rebuilding and there must be a risk that any setback will see people like me putting on their buying boots. Markets do not move in a straight line but beware of being greedy – in both directions.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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