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Nimble picking

Despite the odd nervous shudder running through the market, shares have held up well to suggest that no one really believed the Bank of England was about to raise rates again last week. And it didn’t.

The January minutes, when the MPC caught markets on the hop, were a reflection of a divided group. Given that British Gas announced a 17 per cent cut in retail gas prices last week against a background of sharply lower wholesale prices, perhaps the hope is that inflationary pressures may now recede.

But with the RPI running ahead of the CPI, we can expect some big wage claims. It would be unwise not to factor in another rise or two in interest rates this year.

Not so in Switzerland, where annual inflation fell to just 0.1 per cent. The January numbers fell by 0.7 per cent on a month-by-month basis. This is starting to look like deflation so the Swiss central bank may have to act to ensure the economy stays on track. At least the European Central Bank declined to move interest rates, although a rise in March from 3.5 per cent is in prospect.

Will fuel and energy costs continue to decline? I learned this week that oil production in a major Mexican field was dramatically down and the Saudis may have to curb production in several areas to accommodate maintenance work. The market, on the other hand, has been taking comfort from the rise in the level of inventories.

I have been bombarded with a range of investment research from a wide group of organisations and the views are diverse.

At an investment lunch, where these opinions were the main <a topic, there was agreement on one thing. Markets have continued to behave in a benign fashion but the top-down call is harder to make. Fortune seems likely to favour the stockpicker. Good news, you might think, for the bottom-up fund manager but I am not so sure life will be that straightforward.

There is little doubt that markets may look overdue for a correction but sufficient money is around to postpone this for an indeterminate period. The source of this money is hard to fathom. Corporate activity is responsible in part. The buyout boys have been undeterred by higher interest rates so far. The closer that rates get to 6 per cent, the more likely it is the deal flow will start to dry up.

Another theory is that pension fund and life office portfolio balancing has run its course. That would help, as the expectations are for pension fund contributions to continue to rise. It may also explain why the bond market is reacting in a more nervous manner to inflation and interest rate concerns.

So, it will be the nimble manager to back. Perhaps we will see another 10 per cent on the Footsie in the next few weeks. The closer we get to May, the more concerned I am likely to become. De-risking portfolios through steering clear of highly rated shares and markets still looks a sensible move.

Brian Tora is principal of the Tora Partnership


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