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Investment view

Last Wednesday, I was addressing a group of life and pension salespeople. Traffic disruption held up my taxi, leading to a missed train. Signal problems resulted in a delayed rail journey. A timid driver with a big green P in her back window added to the torment. I was very late but when I arrived the speculation was that I had been using this time to rewrite my speech. It is not difficult to understand why.

The events of last week were so stunning that it was difficult, in the immediate aftermath of the tragedy, to reach rational conclusions of what the implications might be for investors. Indeed, sentiment in the markets in the first few days after the terrorist attack were driven primarily by emotion. Against this background, I had to try to deliver some sort of steer to IFAs and life company representatives that would help them provide their clients with an understanding of what they might reasonably expect from markets.

What could I say? We are in uncharted waters here. It is really no exaggeration to say the world changed on Tuesday last week. The extent and nature of those changes are hard to foretell and will undoubtedly impinge on investment trends. In the shorter term, all we can do is try to measure the likely effects and endeavour to convert our findings into some sort of probable impact on markets in general.

You can divide the effects of last week&#39s tragedy on markets in the US economy into three – the immediate direct effects, those likely to emerge over the weeks and months ahead and possible implications for the longer term. In the first category there is, of course, the damage to the infrastructure of financial trading in America. Security houses will have to bear a heavy cost in re-establishing their trading capabilities. Wall Street being out of action will cost the country dear. But perhaps of the greatest significance is that a very large swathe of lower Manhattan will need to be rebuilt.

This has severe implications for the insurance and reinsurance industries. Companies that assume risks attached to big potential claims have what they call a Realistic Disaster Scenario. This might involve two jumbo jets colliding at an airport. Last week&#39s tragedy is far, far worse and will cost more money than the industry could have envisaged. There are implications for the Lloyd&#39s insurance market, for US insurers and for European reinsurers.

The rebuilding of much of the lower end of Manhattan may, perversely, have a beneficial effect. New York is suffering as lower activity in financial markets has led to lower tax revenues. The rebuilding project, much of which is likely to be financed by federal money, should boost the local economy. This is an emerging effect and it may be some time before we feel any benefit. More likely in the shorter term is the influence of the great US consumer on economic activity.

We were only just beginning to see the slightest signs of recovery in US economic activity. The pump-priming has been going on for some time. The first cuts in US interest rates took place in January. This disaster could knock that recovery off course if consumers run for cover. The Fed and the Bush administration, not to mention governments elsewhere, will be well aware of this. Interest rates seem set to come lower and there may be other forms of stimulus devised to keep the consumer happy.

So much depends on what action Americans take and how this awful tragedy changes the face of foreign diplomacy and attitudes both by and to Americans. Only the bravest would try to second-guess what this may entail. JK Galbraith said there are two types of forecasters, those who do not know and those who do not know they do not know. We all should claim membership of the first category this time round.


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