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Investment View: Bulls tilt the balance

What conclusion should we be drawing from the events in the high street as last year drew to a close? The fact that both Next and Marks & Spencer were able to report a more cheering festive season is remarkable. Popular wisdom had it that they took business from each other but it seems that Christmas present-buying still takes people into these shops.

To be fair, sales growth in Marks & Spencer was largely driven by the food side. Still, Stuart Rose appears to be exerting a tight grip on the business and the shares are now comfortably above the level at which Phillip Green’s bid was tabled.

Elsewhere, the signs confirm this evidence that the British consumer made 2005 a happier Christmas for retailers. In part, this reflects the fact that interest rates have come down just a little and that petrol prices are also off their peak. Earlier last year, when the oil price was hitting new highs and fears of rising inflation was favouring the hawks in the monetary policy committee, retail spending tailed off sharply. The fact that we have seen an improvement demonstrates just how sensitive consumers are to even a modest adjustment to interest rates.

There is some indication that pricing power has returned in some measure to the high street although the internet appears to be keeping the lid on retail inflation to some extent. Online buying is proving increasingly popular, as shown by the John Lewis results.

Even those groups which are perceived as being on the losing side in the store wars have enjoyed better trading conditions than anticipated. Boots’ sales were down by less then expected. Sainsbury’s increased sales significantly and is vying again for the number two slot among domestic supermarket groups. and last year they sold more bottles of champagne than tins of baked beans.

So far as other news published at the beginning of this year is concerned, the picture is looking rather more mixed. Economic data from the US does not paint a universally rosy scene. As an example, the ISM manufacturing index came in a shade below expectations. Concerns remain that the indebted American consumer could go to ground and bring about a slowdown in economic growth. Interestingly, this has been interpreted by the market as a positive indicator. The bullish argument is built upon the belief that a weakening economic situation will ensure monetary tightening comes to an end. Anyone seeking evidence that investors are optimists need look no further than this particular interpretation.

A robust American economy based upon the propensity of the US consumer to spend remains crucial to global economic well-being. The worry is that American consumers will retrench before other countries are able to take up the baton. For example, last year, US consumers spent every penny they earned. Contrast this with other countries like Germany where the savings ratio was as much as 10 per cent of net income but that is why German economic growth has been less than impressive over the past decade or so.

There are signs that performance in Continental Europe is beginning to pick up. German manufacturing is on the up and confidence surveys are showing an improving trend. Given that valuation levels for European shares are undemanding, the case for backing Europe is strengthening. Perhaps we should not be worrying too much about the US at present. The performance of the market so far suggest that the bulls hold the balance of power.


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