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On the rebound

Another week and another rally. By the end of last week, UK shares had rebounded by nearly 30 per cent from the March low – and this despite the impending collapse of General Motors. Perhaps of greater importance is the length of the rally. Recoveries of this nature seldom run for more than eight or nine weeks unchecked. This one is heading for a full three months.

Overseas, the rebound has been even more significant. Markets that suffered the most in the downturn – such as China – have delivered the strongest recovery. Emerging markets are also back in favour.

It seems the investing world is recovering its nerve – for the time being at any rate. Reading various research documents, I find frequent references to “green shoots”. Digging deeper, what they all seem to be saying is that things have stopped getting worse. This recession has been characterised by the speed at which consumers stopped spending and the rapid reaction by businesses to the change in circumstances. Now inventories have been reduced, restocking is taking place.

Similarly, commodity prices are now reacting to the slightly more benign climate. I must emphasise the “slightly”, though. Consumer spending remains subdued and, while production might be picking up to reflect the restocking theme, with unemployment set to rise, there is unlikely to be any real resumption of growth for some months.

The conditions of recent months have certainly favoured stockpickers and special situations managers. It happens that I have been looking at how smaller company funds have been faring recently. A couple have risen by more than 50 per cent during the past six months. Investment trusts specialising in this sector have not fared quite as well but even there the performance has been most encouraging.

Smaller company investment vehicles have been way down the popularity lists for some time. If, as has been claimed by some managers at a recent roundtable discussion organised by the Association of Investment Companies, March proves an inflexion point for the sector, the future could be exciting. But I still feel a better buying opportunity may yet occur.

Brian Tora ( is principal of the Tora Partnership



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