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Going West with confidence

This week sees me making my annual pilgrimage to the West Country. I always find these trips useful in helping to put some perspective on the investment world.

My expectation is for a very upbeat gathering. Shares were making good progress last week. The FTSE 250 index even made it into new high ground despite widespread expectations that all the running would be made by large-cap stocks. This market has had an altogether better feel to it. The worries of the spring seem very distant. Are we living in a fool’s paradise, or has the overall situation improved?

At the heart of the debate is the state of the US economy. It is the expectation of a soft landing and an ending to monetary tightening that is behind the confidence. The numbers are, to say the least, confusing. Business activity took a tumble across all sectors while revised employment figures suggest a healthier labour market than had been thought. Perhaps as a consequence, the Fed chairman Ben Bernanke and deputy Don Kohn, have gone out of their way to dampen speculation that a rate cut is in prospect.

The message they have been delivering is that the correction in the housing market has been desirable and the rest of the economy has been weathering the downturn in this sector reasonably well. It could be that a period of below trend growth for the economy will result but the implication is this would not necessarily be a bad thing. It would seem they continue to harbour concerns over inflation, which is why the next move in interest rates is likely to be up, even if that may not occur until next year.

Despite this, an appetite for risk has re-emerged. This seems all the stranger as rate rises are taking place around the world. If November proves to be a month when the next round of tightening takes effect, it might give investors cause to take stock. The fact remains, though, that many of the fears that were unsettling markets six months ago have failed to turn into significant threats. Equities look to have further life in them for long-term investors.

For the short term, though, there must be some concern over the way in which riskier markets have rebounded. These remain the most vulnerable to any slowing in global growth and the valuation levels leave little to chance. It could be that developed markets get a fillip from the corporate sector, with the US third quarter earnings season just around the corner. But we might have some cautionary noises from company bosses as they try to moderate investor expectations for 2007.

I have been encouraged by the better tone of markets in what has traditionally been a difficult month. It will be interesting to take the temperature of the adviser community at grassroots level.

Brian Tora is investment communications director at Gerrard Investment Management

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