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Easy does it

Last week was memorable for two reasons. It was the first time that quantitative easing was put into practice by the Bank of England. These two words were never heard together in my experience until recently. Like extreme rendition, they have moved swiftly into common usage.

Last week also provided an opportunity for stockmarket historians to draw comparisons with past market crashes. Apparently, the extent of the fall in this bear market has only been exceeded twice before – in the wake of the Great Crash of 1929 when the world slipped into depression and in 1973/74 as a result of the quadrupling of the oil price after the Yom Kippur war in the Middle East.

I remember all too well the dire conditions that existed some 35 years ago. We suffered more in this country because other domestic events combined to create an atmosphere that suggested capitalism was on its last legs. It wasn’t, but it is hard to imagine the rumoured trigger for the recovery in the market’s fortunes – concerted buying of shares by a group of institutions led by our leading insurance companies – happening today.

This time round, we have a crisis of truly global proportions and, again, obituaries are being penned for the capitalist system, yet alternatives are there none.

True, a likely consequence of recent events is a rise in the amount of regulation we have to suffer in our personal and business lives and an increase in government interference in areas hitherto considered to be the province of market forces but capitalism will survive.

Assuming I am right, the only decisions to take are whether asset prices are at acceptable valuation levels and the extent to which the inevitable over-correction in prices has further to go. This applies across the board. Property, commercial and residential, is in a bear phase, along with equities, while sovereign debt looks expensive unless deflation takes hold and a prolonged recession is unavoidable. This is possible. Just look at Japan.

On historic criteria, equities appear near to a bottom while gilts look vulnerable to a correction. Property is less easy to call. Commercial and residential markets may be building pent-up demand. Development has imploded in both sectors and once economic activity picks up, credit becomes more freely available and confidence returns, it is doubtful that supply will develop fast enough to satisfy buying interest. That could be months away.

Bill Mott recently posited three scenarios he had factored into portfolios. Favourite was the hoped-for outcome of government action rekindling economic prosperity in a measured and controllable way. Second was the return of a rising cost of living as monetary easing and weak sterling fanned the fires of inflation. Finally, Armageddon, in the shape of deflation and prolonged recession.

One and two would be good for equities. Three could see markets behave more as Japan has in the past two decades. My money is on governments continuing to push for the economy to turn round, even if it means a return to higher inflation. That would be bad for bonds. We may not have seen the bottom but the risk of being out of the market is rising.

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

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