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Investment view

We held our monthly asset allocation meeting last week – serious big picture stuff. Unfortunately, there is a big shadow hanging over this picture at present. The media refers to it as geo-political risk. It is the uncertainty generated by a possible war in Iraq, by the decision of North Korea to withdraw from the Nuclear Non-Proliferation Pact and by the ever-present threat of terrorist attack. In this, my committee enjoys a level playing field with everyone else in this game. None of us know what the outcome will be. It makes taking decisions particularly difficult.

Later this month, the UN Weapons Inspectorate will be publishing their initial report. Already, we have heard from Hans Blix that, so far, no smoking gun has been found. Analysts settled upon this as an indication that the threat of conflict was receding. They may be right, but the build-up of military might in the Middle East continues unabated. No one is likely to put money on a peaceful resolution to the situation at anything other than long odds.

It would be wrong to single out the Iraqi situation as the most important risk but it is one with a likely timetable. Moreover, its effect can, in some measure, be quantified. Iraq is an oil-producing nation. Conflict within its borders would almost certainly stem the flow of that oil. Add to that the problems in Venezuela and you can understand why the price of oil is higher than might reasonably be expected under present economic conditions.

But the real threat comes if this conflict widens. Behind the scenes, it seems certain that much activity is taking place to try to head off an American-led invasion. While a UN stimulated military campaign might have little effect outside Iraq&#39s borders, the fear is that, if America goes it alone, it will destabilise neighbouring countries, of which the most important is Saudi Arabia. The possibilities of what might happen to the price of oil were that to take place does not bear thinking about.

So we chose to sit on our hands last week. Taking an aggressive stance so close to what could be a turning point did not seem appropriate somehow. Discretion can be the better part of valour, although the other side of the coin, of course, is that a swift, surgical campaign that removes Saddam Hussein from power, or his voluntary exit (unlikely, but widely touted in the press), would undoubtedly see oil falling back into the low $20s and give markets around the world a boost.

Elsewhere, both the European Central Bank and our own monetary policy committee held rates steady last week. This is the longest period that I can remember in this country without a change in interest rates. Of itself, this might explain why consumers are become rather more canny. As interest rates were coming down, so people noticed their outgoings diminish, so felt able to spend more freely. Mortgage payments for this year are unlikely to be any different to those that applied from the beginning of 2002.Even the feelgood factor of rising house prices has lessened. The Halifax announced a fall during December, although its methodology has been called into question.

Another area suffering more than its fair share of woes is continental Europe. Markets there are subdued, even if the euro is strong. Germany received an official rebuke for breaching the stabilisation pack while unemployment there is rising. Their employment laws make it less easy to sack workers than here but signs are that the sluggishness of the German economy is leading even their cautious managers to start wielding the knife. More than four million people – around 10 per cent of the workforce – are jobless in Germany. They most certainly would have liked a rate cut from the ECB.

But at least here we have seen the return of the £1bn deal. The news that Sir Ken Morrison&#39s eponymous supermarket group is to acquire Safeway sent a frisson of excitement through markets. Their agreed deal may not be the end of the story. The merger of these two will catapult them ahead of Asda to become a third force in British food retailing. Neither Sainsbury nor Asda will feel comfortable with that, so perhaps the days of the takeover battle are about to return. I hope so. Watching these markets can be desperately dull. Unfortunately, given the situation in the Middle East, dullness can sometimes be a virtue.

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