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Investment view – Brian Tora

There is good news out there if you know where to look for it. Take the state of our economy, presently the subject of many scare headlines in the newspapers. It would appear that it grew at a faster rate than had previously been suggested during the first half of the year. Government statistics are notoriously unreliable but it is encouraging that those revisions that are admitted have been on the upside.

Then there is the fact that institutional liquidity is at a 10-year high. As this is calculated as a percentage of the total funds under management, this is due in no small measure to the fact that the value of institutions&#39 equity holdings will have declined. However, the cash they hold is up as well, which gives some encouragement to the view that there is money waiting to go into the market once stability returns.

Then there is also the fact that dividends seem to be growing again. Changes to the way in which company distributions are treated for tax purposes – and the decision by an increasing number of businesses to use share buybacks as a way of returning value to shareholders – has distorted the long-term picture but overall dividends on ordinary shares have tended to rise year on year, notwithstanding what might have been happening to the capital value of the market. Of course, this could change if companies themselves take the view that share prices are sufficiently cheap to justify buying in their own shares. This is certainly what has been happening in the US. Perhaps other investors should take comfort from this. They are still not around in too great numbers at present.

Perhaps the most encouraging piece of news has been the extent to which the Federal Reserve Bank is prepared to pump money into the US economy to restore growth. No one is in any doubt that the third quarter of the year is likely to see US GDP dip into negative territory. By all accounts, nobody on the other side of the Atlantic is doing much in the way of spending money these days. But this is a temporary phenomenon, driven largely by an emotional response to the terrorist attacks. The bottom of economic activity, when reached, is quite likely to be in the fourth quarter of the year, which would allow growth to pick up throughout 2002.

Of course, we do not know for certain that the US has dipped into recession. The IMF&#39s survey of consumer confidence suggests that, outside the US, it has not been hit as hard as when fuel prices rose steeply last summer. Even so, they are still predicting a recession by their standards for the world&#39s biggest economies. Fortunately, their standards define a recession as being GDP growth below the long-term trend rate of 2.5 per cent. Even that could be interpreted as good news, if you think positively.

At least the market seems to be recognising that there is some good news around at present. True, US consumer confidence took the expected dive last week but we did succeed in producing more days of rises in the FTSE 100 index than had been achieved since the middle of August. It is worth remembering that the bear market, which hopefully should now be drawing to a close, actually started many months ago. By any measure, this will have been a long and severe bear run. The problem, as ever, will be in calling the turn.

So enthusiastic are central bankers to re-establish the strength of the world economy that inflation may yet return to haunt us, perhaps during the second half of next year. The Fed is priming the pumps with many billions of dollars. Withdrawing that money will not be easy, just as it will not be simple to reverse the policy of cutting interest rates until there are signs that the economy has started to motor again. Inflation may not resurface as quite the problem it has been in the past but do not count on it remaining dead for ever.


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