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Miner to major

Last week was pretty bumpy in the market as we digested the news that the mighty General Electric had faltered in the profit stakes. Speaking, as I was, at a seminar in the Jockey Club after the FTSE 100 Index had had two days of 1 per cent plus swings – first down, then up – it was all too easy to draw racing analogies. But as we have seen on so many occasions recently, a downward spike brings out the bargainhunters. Wednesday last week almost felt like a bull market had returned.

Except that it is resource stocks that seem to be in the vanguard of the market rally – still. With bid rumours driving speculation in the mining industry and oil and metal prices remaining high, investors continue to pile into these shares. The FTSE 100 is looking less and less representative of the underlying British economy. Could it all end in tears?

Oil & gas now accounts for over 16 per cent of the FT All Share index, with mining nearly 12 per cent. Add the two and you have nearly 28 per cent of the index dependent on the behaviour of companies that have benefited from a lengthy bull market in their resources, with the vast majority of their operations in far-flung countries.

Banks were by far the biggest part of our benchmark 100 index and the fallout in the credit crunch was a major contributory factor behind the retrenchment over the past six months. Arguably, a decline in core resource values would have an even greater effect.

What is the poor investor to do? Buy to let is looking played out although good property will always find a buyer.

Such is the importance of the housing market to the economy that the Government is clearly putting pressure on the Bank of England to free up the mortgage market.

Preparing for this seminar led me to look at stockmarket performance during times of recession. The difficult times occur in advance of the downturn. By the time it arrives, markets are generally already anticipating the upswing to follow. Even the Great Depression of the 1930s was preceded by the Great Crash and while markets were nothing to write home about when the jobless queues were long, nor did they continue their slide.

In the 42 full years that the FT Actuaries All Share index has been in existence, the total return numbers show there have been just 10 down years – the rest having delivered positive returns. Even more interesting was the fact that we have already had three negative years this decade – the same as the worst decade since I started in this great industry of ours – the 1970s. There were no down years in the 1980s and only two in the 1990s.

I have no false illusions that life will be easy for money managers. Take the performance of resource stocks as an example. Exclude them and you will have underperformed. Add them and you will be taking a big risk. The central banks might be prepared to bail out the fin-ancial sector. They won’t bail out the miners.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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