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Investment view

Where are you? I know you are out there somewhere. Call me superstitious if you will but I just know these things run in threes. Last week I bumped into two people I have not seen for what feels like a lifetime. It was a pleasurable experience. The third member of this trio must be out there somewhere. Just so long as it is not an ex-wife, I am content to leave it to fate to deliver whom it will to complete the numbers.

Chance encounters were about the best part of last week. State funerals aside, there was a gentle air of bereavement in the market as we drifted down towards the bottom of our trading range. The situation in the Middle East did not help. With oil nudging the top of the Opec preferred price level, the spectre of higher fuel and energy costs – with all the potential knock-on effects – has risen once again.

Conflict in the Middle East has been around for a lot longer than there have been shares to buy and sell. There is also a lot of oil in the Middle East, hence the propensity of the black stuff to rocket in value when rockets are flying. But the situation is not the same as it used to be. For a start, there is a lot more oil around than people thought 30 years ago, when oil quadrupled in price. And we are much more energy-efficient than used to be the case. Americans may still drive gas-guzzlers but they have succeeded in bringing down the energy consumption element of production by nearly half.

Gerrard&#39s asset allocation committee recently looked at the likely scenarios in the Middle East and what the outcome could be for the markets. An escalating war is clearly the least palatable, with gold and high-quality sovereign debt likely to be the only winners. Fortunately, we think this is also the least likely to happen. Too much political capital is riding on some solution being found.

Second to the doomsday scenario is the belief that things will get worse before they get better – and stay bad for long enough to add to the weight of worry that presently exists. This cannot be dismissed but even so it must be a minority option. It could, though, lead to an upward spike in the price of oil, with all the residual worries that this would generate. Not pleasant – but not the end of the world either.

Third is the possibility that tension dissipates, a solution of some sort is cobbled together, America avoids confrontation with Iraq and oil again tests the $20 a barrel level. While it might trigger an Opec production cut, it would nonetheless represent good news for inflation and for economic growth. But it does not feel as if this is a particularly likely scenario if the news bulletins are anything to go by.

Our view is that, on balance – and I emphasise on balance – a resolution will be found and the problem, while not being eliminated, will recede in importance. The consequences would be the maintenance of the oil price within the Opec-accepted limits and little real impact to the market. Little impact, that is, other than the ability to recover some of the risk premium that has been built into share prices as a consequence of the escalating violence in the region.

Meanwhile, I bask in the reflected glory of the value of the houses I own (I know it sounds flash, but saying my home and my London pied a terre does not have quite the same ring) rising in value. Plenty of people are worried that the housing bubble will burst, just as in the early 1990s, while the collapse of the technology boom is too recent to be ignored. However, there is evidence that suggests it is a shortage of supply that is driving prices higher rather than a rash, headlong rush into buying. This is another area where I hope the overall assessment is correct. Buoyant house prices are good for confidence and we need some good news to stimulate what has turned into an unbelievably boring market.


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