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Investment view

What conclusions should you draw from last week’s figures emerging from the high street, asks Brian Tora?

On the one hand, Tesco delivered a stunning set of results, demonstrating it is tightening its grip upon Britain’s grocery trade. On the other, Marks & Spencer’s woes appear to continue unabated while the British Retail Consortium figures suggest that we are still being cautious over how we spend our money. It rather looks as though stockpicking in the stores sector is particularly important but should we worry about the consequences for the wider economy?

Economic growth does not have to be driven by consumers but they can certainly help. The alternative is public spending but this either relies upon a robust tax take by the Government or an increase in borrowing. Just recently, it has been the latter taking the strain but this is not sustainable in the long term. Yet keeping consumer spending on the go can result in raising personal debt. It is a conundrum without an easy resolution.

The message is clear, though. People feel less well off, so they are more careful in how they spend their money. That this should be the case is surely no surprise. Aside from interest rates being higher than a year ago, the rise in the price of oil is now feeding through to petrol pump prices. For many people, spending more for a non-negotiable commodity, such as fuel, will mean less money available to spend elsewhere.

That said the outlook for global growth does not appear too damaged by rising interest rates and dearer fuel and energy costs. Most commentators expect a near trend result for calendar 2005. This should be sufficient to maintain a floor under the equity market. Driving it higher will need some good fortune from somewhere. As the US reporting season gets underway we may get a clue as to whether this is likely.

Of course, the big recent business story has had little impact upon the stockmarket. That a line may finally be drawn under the long running Rover saga will probably come as little surprise to anyone who has watched the changing fortunes of the British car industry over the decades. The fact that they are still there is a source of wonder. But what really is surprising is the way in which a pension fund that apparently was handed over in a fully funded state is now in deficit to the extent that it worried the Chinese enough to call off their discussions.

Admittedly, this was just one of the excuses put forward but there will doubtless be a focus of attention on why a fully funded pension arrangement appeared to deteriorate in such a short period of time. The reality will doubtless lie in the way in which you value future liabilities and the expectation of future returns.

This is not just a pension problem. Anyone with an endowment policy backing a mortgage will have received several letters indicating whether or not the final maturity value is likely to deliver to expectation. Sadly, many of them will say that not enough is likely to end up in the final pot to meet expected liabilities. It rather looks as though the Rover pension fund, which was heavily committed to equities, is suffering from the same assessment as to what future returns are likely to be.

With the election just two weeks away, it is difficult to make short-term predictions for the stockmarket. The reality is that, whatever the result, markets are unlikely to be moved by any significant amount. The greater worry will be the building of inflationary pressures both here and in the US. This is a reflection of capacity constraints as much as anything but in the end it might force the Bank of England to push rates higher.

This, of course, will not improve the outlook for Britain’s high street – which brings us back to last week’s news. Remarkably, despite growing concerns over whether consumers will continue to spend and thus support the economy but increase personal debt or stop spending and remove the prop for growth, most strategists I have been following seem to be increasing the weighting for equities. Perhaps I am just jaundiced halfway through an election campaign but it is hard to feel the justification to do any- thing dramatic for the time being.


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