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Flipping the figures

This has been really rather a remarkable summer, markets-wise. By the middle of last week, the FTSE 100 index was flirting with 5,000 – a level not seen since the dark days of last autumn. The recovery from lows of less than six months ago has been a staggering 40 per cent. In the US, it has been even greater. If this truly has been only a bear market rally, then you still would have been very wrong to ignore it.

But as it happens, signs of green shoots are appearing on an almost daily basis. True, the upbeat data is interspersed with more sobering news but the recovery in share prices has not been without supporting evidence. Perhaps the most important decision for investors to make now is whether to bank the gains of the spring and summer and ride into the autumn cash-rich.

This is what a number of niftier operators of my acquaintance have been up to. They may be right but this market has become very difficult to second-guess. Opinion remains divided on what is likely to happen in the months ahead, with economists forecasting a robust rebound and a second downward leg to the recession equally vocally. It is at times like this I try to look elsewhere for inspiration.

I was reminded recently of a measure of the value of a country’s currency that I have not seen used for some time. The Big Mac index – also referred to as Burgernomics – is a method of comparing how much you can buy in a particular country using a universal commodity as a measure. Taking the US as the base, the cost of a Big Mac all around the world should tell you where is dear and where cheap compared with the home of the burger.

What is interesting about the latest table I have seen is that the UK now looks fair value against America. A year ago, it appeared expensive, with a Big Mac costing a quarter more than across the Atlantic. The eurozone looks dear, although not as much as Norway (the costliest burger) or Switzerland.

If you want cheap fast food, the Far East is the place to go. In China, the cost is only half that of the US – and burgers are similarly cheap in Thailand, Sri Lanka, Malaysia – and the Ukraine. Not that too much should be read into these comparisons. Rent and wages tend to be lower in poorer countries and will have an effect on the price of a Big Mac but it tells an interesting story on currency valuations. One conclusion that might reasonably be drawn is that Britain, having laboured under strong sterling for some time, has now received a reprieve through a steady devaluation.

It also suggests that a worldwide recovery in the pound’s fortunes may not be in prospect. The euro, on the other hand, does look dear. For the UK’s exporters, this will be welcome news and if the currency adjusts it will not be bad news for our holidaymakers, who may find the price of a Parisian burger a little more affordable in the future.

Brian Tora is principal of The Tora Partnership

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