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Pawns in the game

Given the gathering clouds on economic performance, shares have been remarkably resilient. As the autumn approaches and that most capricious of months, October, nears, can we be sanguine over our likely fortunes?

The news remains mixed. Retailers point to a slowing in sales growth that could tip over into a decline, yet House of Fraser disclosed some solid half-year numbers. The consumer is under pressure but the pressure does not seem as great as in the early 1990s.

The other difference this time is the influence of the emergent economies. The population of these countries is many times that of the G7 nations and the average wage in China, for example, is a fraction of what it is in the US, so the influence these countries exert should grow exponentially.

But in the near term, an absence of credit continues to strangle enterprise. It remains the banking sector that could deliver the sort of shock that will unsettle investors.

Warning noises that a major banking collapse in the US is still on the cards have been made at a senior level. Ironically, it has been major corporate collapses that have signalled a turn in market fortunes. In 1975, it was Burmah Oil’s demise that marked the end of the most savage bear market since the Second World War.

Active managers continue to find the vagaries of the market hard. Two fund managers of my acquaintance who have weathered the past year remarkably well have suddenly found themselves slipping down the charts at speed. Both are AA-rated and remain convinced their fortunes will be restored earlier rather than later.

The task of the portfolio constructor is particularly onerous. The allure of emerging markets continues to attract a significant following but what if inflation and a slowing world economy lead to social unrest? Domestic market leaders look cheap but have we had all the bad news from banking and have resource stocks finally completed the catch-up that has been under way for the past half-decade? We do not know – we never do.

Some sectors continue to look avoidable. Gilts, with their sub-5 per cent yields, are buoyed by those who have little option but to buy them. For the average private investor, corporate bonds look a far better bet, unless you believe company failures are about to multiply. Property is a harder call. The commercial sector looks dire but no bell will ring at the bottom here either.

As for all these commodity funds that have sprung up, those late into the game must be regretting the move. Gold, mainly as a consequence of the weak dollar, has delivered good returns, but even that may be coming to an end. As I concluded last week, it’s an ill wind that blows nobody any good. Last week saw Britain’s biggest pawnbroker announce a windfall gain of over £1m due to gains on jewellery melted down and sold as scrap gold.

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

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