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Investment view

How nice that the senior regulator in the UK should try to bolster confidence in UK equities. Some of his comments were, though, a little misleading. By contrasting the fall in the FTSE 100 (42 per cent from peak to trough) with that of the Dow Jones Industrial Average (just 28 per cent down), he merely drew attention to the shortcomings of America&#39s headline index.

The S&P 500, which is much more representative of what is going on in US markets, is actually down by virtually the same as the FTSE100.

Perhaps it is wrong that our market should have suffered as much as that of the US when most of the problems stem from over there but the disparity is not as great as Sir Howard Davies suggests.

Such was the gloom and despondency around at the beginning of last week that analysts were trying hard to find reasons to be cheerful. There is an old saying that investors need to climb a wall of worry before committing money to shares. US investment bank, Salomon Smith Barney believes that confidence issues have reached such proportions that the wall of worry has turned into a cliff of concern. Thirteen cliffs of concern to be precise, according to the research note they put out at the beginning of July. They referred to negative momentum overshadowing fundamentals. Unfortunately, investors do not trust fundamentals in the US right now.

What was interesting about these 13 bear points was that a number of them appear to be self-contradictory.

Cliff four, The Coming Inflation Explosion, is at odds with cliff five, Margin Recovery to be Restrained by Low Inflation. But some of their concerns are very real. Fears of renewed conflict in the Middle East will undoubtedly be exercising people&#39s minds at present, just as the collapse of the dollar is a very real phenomenon that must be dissuading some international investors from backing the world&#39s biggest economy.

But if we do not get market leadership from America, where will it come from? Not, it seems, from Europe where economic activity is muted and the vested interests of sovereign states seem to be taking precedence over the need to observe mutually acceptable economic management guidelines in order to sustain the viability of the euro.

On a personal basis I am in favour of the euro – on balance. It is this “on balance” that is important. A single currency for a diverse group of individual countries demands surrender of some sovereign rights.

It might be a bit of an exaggeration to refer to the federalisation of Europe but such a concept is not entirely far-fetched – certainly in the longer term. Human nature, being what it is suggests we are a long way off establishing an homogenous community in Europe – or anywhere else for that matter. There are enough pressure points around the world to make you realise that we are still far from the utopian ideal.

But to return to markets which were beginning to settle down a little last week, the principal concern remains the ability of world economic growth to remain on track. The signs so far are relatively encouraging.

Consumers remain in buying mode both here and in America, sustained no doubt by the strength of the property market. Indeed, it is remarkable that the poor performance of financial assets has not made greater inroads into people&#39s perception of their wealth. This is where the real risk lies.

A prolonged further fall in the value of equities could create some form of financial crisis. Aside from pension funds and insurance companies being forced to change tack, we could see consumers reining in, with all the concomitant effects that this would have on corporate profitability and economic activity.

Perhaps that is why the regulator has stepped into the limelight to reassure us that we really ought to have more confidence in our own market. After all, it is only regulators and central banks that can claim an unbiased view of events. Except that they are beholden to Governments and Governments need financial stability in markets as much as anybody. In the end, we are all in the same boat. If that is not an argument for us to get our buying boots on, I do not know what is.


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