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Mix and match

Life is not getting easier, even if shares are having the odd good day. The sheer size of daily fluctuations is enough to put off all but the most seasoned investor or those who, more through hope than real conviction, believe they can use these swings to their advantage. Although current news is hardly encouraging, there seems sufficient expectation that somehow we will muddle through to bring buyers out on a regular basis.

This makes trading conditions particularly tricky. The best advice at present seems to be to make your judgement on asset allocation and stick with it, only varying the mix if underlying circumstances change significantly. The problem is determining what that mix should be and that decision is hardly made easier by evidence that old relationships between asset classes and economic conditions appear to be breaking down.

Take commodities, which really has been the place to be in recent years. In the past, surges in the price of commodities have generally been accompanied by equity bear markets. Not so in the case of the bull market in raw material prices which has been in place since the start of the new millennium. True, the first three years of this most recent rise in commodity prices took place against the background of falling share prices but the more recent equity market turnaround has seen no denting in oil and metal prices.

In part, this is because the hitherto inflationary effect of dearer raw materials is less pronounced today. Food, for example, is a much smaller component of the developed world shopping basket than used to be the case. Not so in the lesser developed world, where higher agricultural and other commodity prices are feeding through to a rising cost of living. The implications for the rest of us are far from clear.

The most obvious knock-on effect would be through higher wages being demanded to offset increases in the household budget. This is already happening in China, with the consequence that Chinese goods are now rising in price. This in turn has returned pricing power to those markets that have long been held in check by cheap foreign imports. In other words, inflation in emerging markets will eventually travel through to the developed world.

What this means for the central banks is that they will have to juggle between the Charybdis of a rising cost of living and the Scylla of an economic downturn. Not an easy call, even if all the betting is on prolonged monetary easing providing the solution for any economic woes brought about by the credit crunch. Be that as it may, the reality is that if inflation develops legs, the solution is likely to be painful.

But the economic picture looks far from rosy. Alliance & Leicester’s statement last week did not strike me as a cause for celebration. While the likely loss as a consequence of a writedown in the value of its SIVs portfolio looked containable, the fact that it had only succeeded in financing its lending book until August 2008 is more of a concern. If banks remain unwilling to lend to each other next summer, this former building society may be seeking a suitor in the run-up to the refinancing round that looks inevitable.

So the credit crunch does look as though it will bite in terms of fewer and more expensive mortgages and difficult borrowing conditions for industry.

Of course, it is not all doom and gloom. Abu Dhabi producing $7.5bn for Citigroup seems one reason to be cheerful. Indeed, it is hard not to wonder if a consequence of what is taking place in developed money markets at present will be an acceleration of the transfer of wealth from the cash-strapped West to the cash-rich East.

Brian Tora (”> is principal of The Tora Partnership


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