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Investment view

Watching, as I did, the coincidence of the delivery of the 2003 Budget and the fall of Baghdad from the comfort of a sun-drenched terrace several hundred miles south of the City, I could not help but think the Chancellor had missed a trick. Wednesday last week was surely the day to slip in that tax increase that is looking more and more necessary. Who would have spotted the sleight of hand when the images of the day were dominated by a toppling statue?

Knowing that the monetary policy committee was completing its deliberations under cover of a blanket of snow while the hardest decision I had to make was which pair or shorts to wear was somewhat satisfying. Yet the degree of detachment that taking a holiday while so much was going on in the world was not entirely comforting. What were people saying about the Budget? How would the market greet the successful completion of hostilities? Isolated from opinion forming comment, I realised I would have to make my own mind up on what it all might mean.

The war remains the wild card but overall the effect it has had on markets seems less significant than many will have supposed. The FTSE 100 index failed to break out on the upside as the battle for Baghdad went the way of the coalition forces while sterling weakened against the euro on that fateful day last week. Perhaps the real clue lies there. Markets are looking through the war at the underlying economic fundamentals. The picture that emerges is far from clear.

Given that the Chancellor&#39s spending programme has been in the public domain for some time while this month sees the implementation of a tax rise to help pay for his plans, to expect anything radical last week would have been unreasonable. It is the assumptions on which Gordon Brown is basing his arithmetic that were the real focus of attention. That he appears more optimistic than most observers is clear but that does not mean he is necessarily wrong. Some of the forecasts do, though, suggest he is expecting things to pan out in a way which will have implications for markets.

Take the expectation of robust export growth next year. A rebounding world economy could provide a background for the UK to do better in delivering goods and services abroad but it seems more likely that this will be achieved through a combination of better economic conditions and a weaker currency. Already, the fall in sterling has had an effect on inflation. The underlying rate now stands at 3 per cent yet the Chancellor believes it will fall back to his target of 2 per cent. With virtually full employment, it seems inconceivable that growth of the order he is expecting can be achieved without further upward pressure on inflation. We may yet see a further rate cut from the MPC but by the end of this year, the direction for interest rates seems more likely to be up.

Would that the direction for the stockmarket could be up as well. The two weeks I spent sunning myself were by no means bad for equities but the failure of shares to do little more than hold their own shows how dependent we are on the economy coming right rather than just a successful conclusion of hostilities. The Chancellor did not use the opportunity the Budget provided to hit us with higher taxes but they may yet come. The market knows the way ahead is far from clear. All of us should be hoping that the Chancellor&#39s judgement is correct.

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