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Investment View: High summer – realistic expectations

This is meant to be a quiet time of year for catching up in the garden and long week-ends at the coast. Instead we are being bombarded with market-moving news. Given that many of those charged with managing the wealth of the nation are off on bucket and spade duty, the fear is unexpected events will have a disproport-ionate effect on the behaviour of shares.

The news is by no means bad, although there has been concern regarding some of the economic numbers. Take last week’s inflation figures as an example, the Consumer Price index rose to 2 per cent – the highest level since May 1998. Little wonder that those looking forward to an interest rate cut are worried over the implications for the Bank of England’s monetary policy. Chances are it will make little difference to the MPC’s deliberations.

This rise in the cost of living was well signalled. The expectation that higher food prices would feed through into the infla-tion numbers prompted most forecasters to predict the outcome which was actually delivered. Anyway, it is bang in line with the government’s target, so no action app-ears necessary on the interest rate front. Moreover, core inflation actually declined.

There was also news that the introduct-ion of the new-risk based levy to ensure the Pension Protection Fund has adequate resources will be brought forward. The reason is that the 300m available is now deemed inadequate. The mere existence of the fund creates a need in an industry where many schemes are light on resources, yet the cost of meeting liabilities could weaken corporate financial strength.

It is reminiscent of the building of the M25. While it was a necessary to help traffic congestion in Central London, it added to traffic flows. Securing the future of the PPF is important but there seems little doubt stories will abound over the fund and the firms it is bailing out in the years ahead.

The news that National Car Parks was to be sold by the private-equity firm that had bought it a few years ago attracted my att-ention. It was not the sale price that looked interesting – nor the fact that CinVen, the vendor, has succeeded in returning to inv-estors nearly 1.5bn. It was the fact that the sale was to another private-equity firm, showing that there is still a lot of money chasing deals in this particular market.

You only have to look at how AIM shares performed once we passed April 5 to realise prices of small and private businesses were inflated by the amount of cash seeking a home before the old tax year came to an end. Private equity and venture capital trusts have become as popular as hedge funds as a way of diversifying financial assets. But when too much money chases a single asset class, prices become unrealist-ically inflated. And one private equity firm selling to another sounds too much like a game of pass the parcel to me.

Where does all this activity and news leave the market? Probably vulnerable to profit taking in my opinion. Having breached 5,200 on the FTSE 100 we need a flow of good news to support valuation levels. Only the half-year reporting season is imminent and it is hard to see much in the way of welcome surprises emerging. Do not expect a rout, but keep expectations realistic as high summer settles in and we try to rekindle a holiday mood.


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