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Investment view

Markets are making me feel distinctly uncomfortable. It is remarkable how the influencing factors can change without you really noticing until afterwards. A few weeks ago, I was reading that the rise in the price of oil is due entirely to the imbalance that exists between supply and demand. Yet we now have another reason for an oil price spike – conflict in the Middle East. It makes me wonder whether, in the years ahead, we will even remember that oil stocks in the US were depleted and dealers worried over the consequences of a hard winter.

It would be wrong to disregard the conflict in the Middle East but life is very different to the last time helicopter gunships were flying over the desert. In 1990, when Iraq invaded Kuwait, the price of oil went through the roof and stockmarkets became understandably nervous. Perhaps most significant was the fact that share trading volumes dried up. The period between Saddam Hussein&#39s offensive and the conclusion of Desert Storm was not a pleasant time to be dependent upon stockbroking commission.

In 1990, the term “new economy” had not been coined. Today, many of the major companies in stockmarket capitalisation terms have no dependence on the cost of oil. The effects of a period of high prices is unlikely to be as significant as the consequences of previous oil shocks. Indeed, it might encourage some structural change which, in the long run, would do no harm. Refining capacity, particularly in the US, is inadequate and old fashioned, with any opportunity for replacement complicated by environmental issues. Americans, in particular, still spend energy with a freedom we find hard to understand in Europe. Eventually they will need to be more sparing in their use of oil and develop alternative energy sources.

Of course, it is not just the rumble of gunfire and soaring crude that has unsettled markets. The whole question of how to value new economy stocks remains crucial, while corporate debt is also suffering turmoil as worries build over the extent of borrowing that some companies are acquiring.

Last week, Robert Griffiths, chart supremo for HSBC, paid us a visit from New York to explain why the market has got it wrong and we should all be piling into equities. Robin and I share the distinction of having worked together during two previous incarnations, so I appreciate that, unlike some technical analysts, he does not ignore fundamental influences. In particular, he points to the year-end window dressing that takes place in big portfolios, most notably in the US, where mutual fund managers prepare for the onslaught of money into personal pension vehicles at the start of the new tax year in January. He sees no reason why this year should be an exception. Of course, he was talking before the violence between Israelis and Palestinians was ratcheted up a notch.

At the back of his contention was the Kondratieff cycle and other economic indicators, which he plots religiously. He points to the fact that the Kondratieff cycle – which looks at longer-term trends – started to move upwards in 1995. Typically, we could expect this uptrend to continue for a quarter of a century although Robin feels this cycle will be compressed, perhaps lasting no more than 20 years.

Even during an upswing, bear markets will occur, but they should be relatively benign, with lows failing to break below earlier market bottoms. He thinks we are in a bear cycle at present which may very soon be coming to an end. The demographic argument is the continuing effect of the US baby boomer generation. Starting in 1947, there were 20 years of a high birth rate, so even the oldest of these are unlikely to be drawing their pension yet. The position will look very different in 2025 but by then I may have had to purchase my own annuity.

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