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End of a trend

With children returning to school, summer holidays little more than a memory and evenings beginning to shorten, it is to be hoped that the listless drift of the market might transpose into something more positive. With sterling weak, there seems reason to expect shares to deliver more robust performance and there is a feel of a floor developing.

True, we are now officially ex-growth in this country. Can this really be any surprise? The signs of a downturn have been gathering for some time. About the only unexpected element of our economic performance is that a positive tone has held up for as long as it has.

Now we know that the longest sustained period of rising GDP has come to an end. So much for building a non-cyclical economic model, as Gordon Brown once claimed was possible. The reality is that all trends come to an end and all markets over-react in both directions. The clever way in which loans could be shifted off balance sheet led to an orgy of lending – an over-reaction, if you like. Doubtless, we will tighten too far as banks endeavour to de-risk their loan books – an over-reaction in the opposite direction. This tightening will contribute to the economic slowdown that is already so evident.

Might the same happen in commodities? Some pullback has already taken place, suggesting the buoyant conditions that fuelled the oil and metal bonanza are evaporating. Slowing demand may indeed be persuading buyers to hold fire but more likely it is the uncertain future that is encouraging speculators to seek excitement elsewhere. We should welcome these calmer conditions but it is worth trying to look further ahead.

There have been some structural changes to demand patterns for commodities in general, primarily as a result of the continuing industrialisation of the so-called emerging countries. The changes that might still occur are staggering in their potential effects. In the US, for example, oil consumption per head is 25 times that of India. It is the realisation of what might take place that has driven much investment thinking of late.

Many commodities are relatively inflexible in terms of supply. Natural resources are finite, so increasing availability is far from easy. In the oil price boom that accompanied the Iran/Iraq war, much was made of the opportunity to extract the black stuff from shale deposits, a costly exercise. As the price subsided, these plans were soon mothballed.

The one field where perhaps greater availability can be developed is soft commodities – agricultural resources. Increasing farming efficiency in such places as Africa could do much to solve what is beginning to look like a global food shortage. Even here, the future is far from certain as weather and disease can deliver devastating consequences. It seems we may have to learn to live with dearer metals, energy and food prices for some while.

It is a brave investor who bets against resource stocks rebounding from the setback we have seen in the summer months, except that a weakening world economic outlook may well restrain enthusiasm for the sector. The possibility of some form of geopolitical upset has also increased massively in recent weeks. The fact that the Caucasus, where oil, metals and wheat are important components of the local economy, has moved into the limelight hardly gives cause for cheer.

Meanwhile, housebuilders are disclosing just how much pain they are feeling as they write down the value of their land banks and renegotiate their banking covenants, pub operators confirm that we are drinking less in their establishments and banks continue to be buffeted by the ongoing credit crunch.

At least shares are approaching autumn in a steadier frame of mind. Perhaps investors are looking through the problems to revival ahead.

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

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