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Investment view

It looked very much like touch and go last week. For all I know, by now we may already have gone. The FTSE 100 index was drifting back towards 5,000 as the week drew to a close. Bears were in the ascendancy and it was starting to become all too believable that any breakout would be on the downside. Wall Street came to a brief and somewhat inconclusive rescue mid-week but even the mighty US began to look tired. Would we live to fight another day? If so, for how long?

Unless anything remarkable has happened in the last 48 hours, I am inclined to the view that the relentless sideways movement of the market is likely to continue for a little while. We know from the minutes of the meeting of the monetary policy committee, published last week, that the damage done to confidence as a result of the Enron affair led members to consider whether or not some further encouragement should be fed into the market in the form of an interest rate cut. Given slowing consumer spending, this is not a fanciful notion.

There is precedent for such a move. The problems that the collapse of Long Term Capital Management exposed led the Federal Reserve Bank to cut interest rates to avert a banking crisis. The Bank of England faces a different sort of problem today. It may be one of confidence but it underscores the way certain aspects of our world have changed dramatically.

A slowing economy will expose any weaknesses in the financial system. Plenty of companies are going through the hoop of investor disenchantment about the way their figures are compiled. At its worst, it is possible for a company to go out of business. Even when these problems are not that great, significant shareholder value can be eroded.

It is at times like this that you would expect a flight to quality. Arguably, this is the case in the bond market, where spreads between investment grade bonds and the junk classes are widening. In equity markets, though, it is a much patchier picture. You only have to look at the outperformance of some emerging markets to realise that the urge to achieve capital outperformance is still driving many managers.

Of course, some of these markets have their own problems but it has been possible to achieve some fairly spectacular returns over the past year. Whether this will continue might depend on the attitude of a giant Californian pension fund. Last week, Calpers, which has over $150bn at its disposal, announced that it was withdrawing from certain emerging markets on ethical grounds. Indonesia, Malaysia, the Philippines and Thailand joined a long list of markets into which Calpers is not prepared to commit money.

Perhaps this signals a wider concern among the investment community. Barclays Global Investors, one of the biggest fund management groups in the world, announced in January that it was seeking a specialist consultancy to investigate companies that might contravene internationally agreed social, environmental and ethical standards. Socially responsible investing is undoubtedly on the increase but when the level of exclusion extends to whole markets, it could be that we will see a shift in fund flows.

Quite how important this will be is difficult to gauge. Only $1bn of Calpers&#39 funds under management are earmarked for emerging markets. But then these markets are small. It does not take a lot of money to get them on the move. Nor does a lot have to be withdrawn for liquidity to dry up and performance deteriorate.

Meantime, we wrestle with the problems of how risky we consider ordinary shares. No doubt, some good will come out of recent developments. New accounting standards and greater transparency would be a plus. Doubtless, once confidence returns, caution will once again be thrown to the wind.


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