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Nuts in May

Having returned to these damp and cool shores from sunnier climes, there has been a lot to catch up with. It was a mixture of good news and bad news.

In the vanguard of the good news brigade has been the continuing flow of positive information from corporate Britain and the robust nature of stockmarkets on both sides of the Atlantic. Bids and deals continue to bring cheer to investors. May could yet prove to be the month to sell and go away but we have been mercifully free of the upsets that characterised this time last year.

Also supportive of the bulls has been the economic data that has been emerging – well, largely supportive anyway. Inflation has slipped back below 3 per cent. Perhaps the easing of inflationary pressures will remove the further increase everyone is expecting.

But the Bank of England governor all but said outright that another quarter-point rise this summer would be needed to bring inflation back to its target level. In a poll by Reuters (itself in the M&A news), the number of economists who believed a further rise is in prospect all but doubled as a direct consequence of Mervyn King’s comments.

On the other hand, economic growth in Europe has come in above expectations and comfortably ahead of the American numbers. At least there has been some reduction in expectations for inflation in the US and there has even been talk of the Fed bringing interest rates down in the not too distant future. With the US housing market in continuing disarray (the National Association of Home Builders said sentiment in the US housing industry was at a 15-year low), anything that takes pressure from hard-pressed homeowners will be very welcome.

Lombard Street Research considers that the trouble afflicting the US housing market is already cutting more than 1 per cent off American GDP. With the apparent bursting of a property bubble in Spain, and fears that unsustainable rises in the value of housing has been taking place elsewhere in Europe, there may still be problems ahead.

But they do not appear to be occurring here in the UK. Despite the recent rate rise and with residential property at historically high levels in terms of affordability, a survey from the Royal Institute of Chartered Surveyors last week concluded that house prices were continuing to rise.

We have an imbalance between supply and demand and the signs are that we are seeing more inward migration than the Government would have us believe. One of the biggest brakes on progress over recent years has been the falling birth rate and ageing population of the West. The fact that America continues to enjoy a positive influx of migrants has been a contributory factor to its continued – until recently, anyway – outpacing of Europe in the economic stakes. This has been one of the key planks behind the rapid economic growth of the Pacific region. It is here, though, that we find one of the concerns over the likely wellbeing of markets.

Concern is increasingly being expressed over the excessive exuberance within China’s A-share market. The fears are that a bubble is developing which will have unfortunate consequences if the government does not act to restrain activity in this market.

Raising interest rates would help, as would liberalising the choices available to a increasingly wealthy domestic population eager to join in the burgeoning capitalist scene. We might find any slump in shares has a greater effect than the last time this happened, nearly a decade ago. It was not very comfortable then. No wonder Anthony Bolton is counselling caution to his successor and warning that value is increasingly hard to detect.

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

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