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Reality will bite

December’s stockmarket performance was pretty much to be expected but I confess the rush with which the New Year was ushered in caught me a little by surprise.

January is, after all, an important month for investors. The Americans say, as goes January, so goes the year. But a fifth year of double-digit returns for the equity investor? I wonder.

In case you have not yet caught up with the places to be in 2006, then Cyprus and Peru were the markets to back. You might, though, have backed one or two of the so-called Bric markets. With Neptune’s China and Russia funds heading the tables for the year just ended, such an approach would have proved worthwhile.

Not that making money appeared to demand a high level of risk-taking. Our own market rewarded well, with small and mid-cap stocks comprehensively trouncing the leaders. Europe was an even better place to trust, with a strong euro adding to the returns gained by, in particular, US investors. Against such a background, is it any wonder that the pundits are predicting a repeat performance for 2007?

Except me, of course. Frankly, experience has taught me that markets cannot continue rising indefinitely. Corrections can – and will – set in. Perhaps it will not be this year but the reality is that the longer the bull market persists, the greater the likelihood of a bear phase establishing itself. You could, after all, have lost money in Japan quite easily in the past 12 months. Virtually all the tail-enders in the performance charts for 2006 were Japanese funds. True, the Nikkei 225 index did finish up on the year – just.

A soft landing for the US economy is being touted as a likely outcome despite an apparently dire housing market, while the UK and Europe continue to deliver solid, if unspectacular, growth. With the populous nations of the Far East and the Indian sub-continent enthusiastically picking up the consumer baton, where is the real concern?

Let us start with debt. Never have individuals, or some countries for that matter, been saddled with so much borrowing. With debt comes gearing – beneficial when everything is going according to plan but disastrous if the climate turns less favourable. Back in the early 1990s, when house prices moved swiftly and comprehensively into reverse, the extent to which household finances were blighted by negative equity was significant indeed.

Of course, the situation today is different. Aside from the seemingly inexorable advance in the demand for homes, the body responsible for setting interest rate levels has been depoliticised. This may not protect us from a downturn in the price of residential property but at least it suggests that decisions will be taken for the best of reasons.

In the US, we may yet see some significant fallout from what is being dismissed as no more than a pause in the housing market. Last week saw a big mortgage lender stop taking loan applications and lay off 80 per cent of its staff as a consequence of deteriorating conditions.Times are tougher there than you might think.

To put the record straight, I am not turning my entire portfolio into cash. Nor, for that matter, am I taking out put options on the market, as Anthony Bolton is rumoured to have done. Rather, I am being more critical over what I hold and why, and I am watching more closely the valuation levels of the investments I hold. It may not prevent me from losing money if a setback occurs but it should limit the extent to which I suffer.

Brian Tora ( is principal of the Tora Partnership.


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