Investment View

There are times when I wonder whether the best investment process is

really the dartboard or a collection of monkeys at keyboards selecting

stocks at random.

Despite all the years I have spent watching share prices and managing

money, I confess that sometimes it can be difficult to work out what drives

markets.

There we were last week, stunned by some, to say the least, worrying data

from the US when, admittedly after an initial sell-off, in rode the seventh

cavalry. Buyers were bottom-fishing again – as they have done on so many

occasions. Of course, by the time you read this, it could all be different.

We will have enjoyed a bank holiday over here. You cannot expect American

traders to take May Day, with its socialist implications, as a holiday away

from their screens. So we could be several percentage points adrift from

where we were at the end of last week.

But the fact remains that the market absorbed the news of accelerating

wage inflation, rising consumer spending and the continuing runaway growth

of the US economy with remarkable equanimity. They seem far more worried

about what will eventually happen to Microsoft.

Now, there is a story that will run and run. The shares took a heavy hit

on the back of results which were, to be totally fair to the company, not

at all bad. But it seems that in the perverse sort of conditions that

presently exist, any news was taken as a signal to bash the shares.

Certainly, Microsoft has not been getting too good a press lately. But at

least the Nasdaq is starting to rebound, showing there are people out there

who still believe technology is the only game in town. Investors over here

should be warned that a few early dotcom entrants over there are starting

to fold.

Unfortunately, the figures published in the US last week, particularly

those relating to GDP growth and wage rates, which rose far more than

analysts were anticipating, must make investors rethink the likely out-turn

of events as the year progresses.

We have already seen the European Central Bank put up interest rates and

many believe the Bank of England&#39s monetary policy committee will follow

suit very shortly, though heaven knows why, of all the major economies, we

need an interest hike less than any.

The question is, what will Federal Reserve boss Alan Greenspan do about

the deteriorating situation on the other side of the Atlantic? The “i” word

is back in vogue. Inflation looks set to become an issue once more. People

are no longer talking about just another 25 basis points on interest rates

when the open markets committee meets on May 16. A full half percentage

point must be on the cards. Perhaps they will even raise interest rates to

7 per cent to try to slow the runaway US economy.

Of course, a stockmarket crash would probably do the Fed&#39s work for it but

that is not really in anyone&#39s interest. Nor is it clear that Alan

Greenspan considers an orderly setback in markets is achievable.

He has reacted before to prevent a share price rout and although he must

feel less inclined to step in under present conditions, who is to say at

what point he will feel enough is enough and that even a little bit of

inflation is preferable to middle America suddenly feeling desperately

poor?

Poor is certainly not what our Government feels at present – £22.5bn must

be beyond their wildest dreams. There could be casualties from this though

– and not so directly apparent as the shareholders of those companies

forced to pay through the nose to acquire the third generation of mobile

phone licences.

This money, which is quite likely to be paid up front, given the structure

of the deal, will remove any necessity for the Government to issue any more

long gilts. Annuity rates seem likely to remain under pressure, even if

short-term interest rates rise.

The raising of the age limit for compulsory purchased annuities will help

a little but we must be entering an era when the whole business of how you

should draw your pension is re-examined. Now, there is a chance for a

reforming Chancellor.