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Investment view

Last week we had the interest rate equivalent of the triple witching hour. Three monetary policy committees, three decisions. In the event, none of the central banks – Europe, the US and our own Bank of England – chose to vary the rates already set. No one was much surprised either.

The case for cutting rates in the UK has been undermined by the weakness of sterling. Aside from the fact that lower interest rates might accelerate the speed of the pound&#39s decline, the expectation is that cheaper money will boost the economy, necessitating a reversal of the current easy money policy. We will have to await the minutes of last week&#39s meeting to find out exactly what was said but the chances are that sterling weakness played its part in the committee deciding to leave rates unchanged.

It is in Europe where the biggest disappointment comes in rates not being cut. Two and a half per cent is hardly high but a number of continental European economies are seriously suffering. Germany, for one, looks in danger of slipping into recession. They need a lot more than cheaper money but it would at least be a start.

The most we got out of the European Central Bank was an indication that it is are easing its stance on inflation. Two per cent remains its target but it is now talking about aiming for an inflation rate of “close to – but below – 2 per cent”. It is amazing how much you can read into a few simple words.

Last week also saw the FTSE 100 index regain the 4,000 level. The victory was short-lived. Profit-taking hit the market almost as soon as it clambered over this particular hurdle. Bulls and bears are locked in conflict. It is all too close to call at the moment so heaven knows where the index will be by the end of this week.

You would have thought that one consequence of the Baghdad bounce would have been rising confidence among investors. Not so, according to research conducted by the Association of Investment Trust Companies. It found that 27 per cent of investors were now less confident about investing in the stockmarket than they were before hostilities began, compared with 15 per cent who were more confident. Most of those polled sat on the fence and decided the end of the war made little difference to how they viewed the market.

Certainly, the evidence suggests that the recent rise in share prices took place against a background of thin trading volumes and was largely institutionally driven. Private investors have been very coy over putting their toe back in. Sales of Isas were down 30 per cent compared with last year, which itself was only half the level of the previous year. This bear market has driven many away from the stockmarket.

So what will the market do between now and the end of the year? The popular belief is that we will have a year of average returns, perhaps 5 to 10 per cent up on the level at which we started the year. As the market is very little different today to early January, that suggests a 5 or 10 per cent gain from now – hardly the magnitude of return that will win over the hearts of investors who have lost so much money in the previous three years. Add to that the negative publicity surrounding the continuing fat cat debate and you start to understand why private investors are so reluctant to re-commit.

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