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High brow

If, like me, you are all Budgeted out, you won’t necessarily thank me for returning to last week’s exercise in unrestrained optimism from the Chancellor with the strangest eyebrows since Denis Healey.

That is not the only thing they share in common. It was while the generally jovial Mr Healey had charge of the Exchequer that the UK’s finances deteriorated to the extent that we had to be bailed out by the IMF. With Government debt scheduled to hit 80 per cent of GDP, an action replay cannot be ruled out.

It might be considered a little perverse that markets did little more than persevere with their sideways movement. Well, initially at any rate. And I am really only talking about equities. Sterling took a bit of a pasting as the funding plans unfolded and gilts were similarly challenged.

With inflation in negative territory, a weaker currency does have its attractions. Imported inflation can probably be accommodated, our exporters gain a competitive edge and people are more likely to holiday at home.

Travelling, as I will be shortly, into euroland, you cannot expect me to be quite so sanguine about the decline of the pound.

It could have consequences for portfolio construction. Much is made of the international nature of the FTSE 100 group of companies but there is still a risk that market gains will be eroded by currency losses. Or put more accurately for a domestic investor, that there will be more money to be made out of investing overseas through currency translation.

It may already be a little late to take advantage of some of these markets. The way in which some Asian shares have rebounded recently has been remarkable. Much of the more positive economic signs are emerging from the East. There are encouraging signs from the US, although it is very early days there. Still, you would have done rather better in the American market since its recovery than remaining back home, without the dollar uplift.

All of which should remind investors that the world has become a much smaller place. Investing abroad has never been easier. Perhaps that is just as well, given that the amount of debt being taken on here risks reducing the UK to banana republic status. Looking overseas for opportunities is starting to look prudent.

It is not without risk, though. In the IMF’s financial stability report published last week, fears were expressed that emerging markets had become an altogether riskier place. It foresees a further contraction in credit and trade, with disastrous effects.

Given the way that these markets have comprehensively led the rally since the March lows, you might think this was just a value judgment. It is a real concern, though, with Eastern Europe singled out as an emerging problem.

But looking on the bright side, shares behaved in a remarkably robust manner in the immediate aftermath of the Budget. Government stocks took a breather – not before time. With the pricing of credit default swaps suggesting UK plc is a riskier proposition than British American Tobacco, it is clear the extent of the issuance planned is raising alarm bells. Now, this does seem one asset class to avoid.

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

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