With Christmas accelerating towards us and just a few trading days left before we embark upon the adventure that will be 2004, it is looking fairly certain that this year will post a positive return, perhaps even into double figures. Last week also saw the Dow Jones close above 10,000 for the first time since May 2002. There is a better tone to markets, yet you do not have to look very far to find traces of bears whoare still roaming around. Has the market got it wrong or is it the bears who are in a state of denial?
There is little doubt that the picture has steadily improved as the year progressed. Led by Asia, the world economy is picking up a head of steam. Corporate profits are bouncing back from the depressed levels of last year. There is much to justify current optimism but all this is taking place at a price. The price is increased
indebtedness, both at a personal level and by Governments. The bears are not without some cause to warn us that the picture is not as rosy as we might think.
We already know that Gordon Brown has severely underestimated the amount of money he will need to borrow to maintain the level of Government expenditure to which he is committed. If, as a consequence of his spending plans, the domestic economy picks up, then perhaps he will have sufficient tax revenues to start reducing the debt. But this is a high-risk strategy on which he has embarked and on which his reputation hangs – just one reason to be a little cautious as the year draws to a close.
Thinking back over 2003, it has clearly been a period more of opportunity than threat. Emerging markets have certainly come into their own. Brazil would have more than doubled your money if you had chosen to invest there. Indeed, the shift of economic power away from the developed world is gathering pace. Investors need to recognise this but they must also remember that backing the high-growth countries is not a strategy devoid of risk. But then, given the performance of the dollar, putting your faith in the world's biggest economy has not been an easy ride either.
Commodities have also been a feature of the past year. Most notably, gold has rewarded its followers, although the rise is as much a consequence of the weaker dollar as any real demand for the yellow metal. But other commodities have also appreciated and even oil has remained stubbornly high at just short of $30 a barrel. In a way, this is an encouraging sign. Strong demand for oil is a clear indication that economic activity has improved but it adds to industrial costs and could impinge upon inflation, not that a rise in cost of living has been something we have needed to worry about during the past year.
We enter 2004 with a new inflation measure in the UK – a change that was well signalled but which demonstrates the misleading nature of so many statistics. The consumer price index, as we will all have to learn to call the new inflation measure (the harmonised index of consumer prices, as it is more usually known, had earned the acronym “hiccup” – something which the Chancellor clearly does not wish to contemplate), does not include property costs. In practice, this is a very large percentage of a British family's annual expenditure.
Ignoring it seems a little strange but ignore it we will.
And so we end a year where we have seen most major markets stage a significant recovery but where some investors still distrust the level of share prices. So far in 2003, you should have made 10 per cent from the FTSE 100 index – about the same as you would have gained in sterling terms in the US, even though the Dow Jones Industrial Average is up by double that amount. We have also enjoyed renewed demand for commodities but have seen industrial power migrate Eastward.
It has been a year where financial scandals have been less high profile but where concerns remain over the conduct of financial services businesses, particularly in America. Deals have been done and both profits and losses made. It has, in other words, been the usual curate's egg of a year. Let us hope that 2004 will be no worse and that we can build upon the recovery that is under way. I sit on the bullish side of the current debate but, like the year that is about to end, I will be content with modest returns – providing that they are positive.