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Only the brave

There were times following the general election when I found myself wishing I had stayed on holiday. As the Greek tragedy rumbled on, so investors became increasingly nervous. It all rather overshadowed the publication of the Coalition Programme for Government, as the Nick and Dave document was called, and the Bank of England’s monetary policy committee minutes, which disclosed, unsurprisingly, unanimity in a desire to keep interest rates down.

Heaven knows where markets are likely to be now. I was reminded of conversations held with Professor Tim Congdon, the economics guru who had been an adviser to the last Conservative Government.

At the end of the last century, Tim and I had both worked for different parts of the same financial conglomerate and often shared a platform – him on the economy, me on markets. As the date for the launch of the single currency drew ever closer, he would state quite forcefully that it would not happen. In this regard, he somewhat underestimated the political will of the French and Germans to get it through. Once it became a reality, he simply changed his approach to one that it would not work. He may yet be proved right and it will be ironic if it is the Germans that eventually pull the plug.

We should know by now whether Chancellor Merkel has persuaded the German Parliament to support the rescue package to bail out Greece. If they have, it will be because they will be expecting significant changes in regulation and fiscal discipline. The uncertainty of all this sent markets into a tailspin, with confidence hardly helped by Germany’s unilateral decision to ban naked short-selling.

The UK has been caught in the crossfire arising from the eurozone crisis. The pound has been dragged down againstthe dollar with the euro, even though we are not directly involved. This is just one act in what could turn out to be a prolonged saga

Our own FTSE 100 flirted with 5,000 on the downside again, just weeks after regaining 6,000 was starting to look like a possibility.

Of course, the volatility of the market bears witness to the concentrated nature of the constituents. Mining shares are now so important that when they shift into reverse, the index takes a serious hit. With the new tax in Australia and fears of further Chinese tightening, this sector has plenty to unsettle it.

To some extent, the UK has been caught in the crossfire arising from the eurozone crisis. The pound has been dragged down against the dollar with the euro, even though we are not directly involved. Still, the risks to European economic recovery and our own wellbeing are considerable if the price of keeping the euro intact is a period of severe austerity. Sadly, this is just one act in what could turn out to be a prolonged saga.

Meanwhile, it does appear as though inflationary pressures are building, with our own Retail Price Index back above 5 per cent over the past year.

Some private wealth managers of my acquaintance have been buying indexlinked gilts as a hedge. Indeed, if there has been one beneficiary of the current turmoil it is the gilt market as investors flee to quality – with the result that it is now hard to find any value there. However, one aspect of the current situation from which investors can take comfort is the wide variation in opinion expressed by the investment community. Attending a G&N investment trust seminar last week, I was struck by the opposing views that came from the lectern, with bears and bulls in equal measure. In my experience, the real dangers arise when a general consensus emerges. Still, with Europe in the state it is, it would be a brave investor who stuck his neck out.

Brian Tora (brian.tora@ is principal of the Tora Partnership


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