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Starting blocks

January usually sets the tone for the rest of the year in stockmarkets. As markets rise more years than they fall, January is more often than not kind to investors but this year could be different.

December, after all, was not quite the bundle of fun we have come to expect of the festive season. Driven by book balancing at the year-end, the weight of buying that can develop, particularly towards the end of the month, usually ensures the year closes on a high. The FTSE 100 did end the month higher than it started – just – but the 24 points it rose conceals some wild fluctuations.

Looking through the myriad of forecasts for the year ahead, I am comforted by the wide range of opinions expressed.

Last year, the bulls were in the ascendancy although there were dissenting voices. Anthony Bolton was reported as having taken out a put option to protect his portfolio against a market setback.

Judging by my comments a year ago, I was hardly a raging bull. Rereading my comments 12 months on, it is hard not to feel a little smug. Warning of impending problems in US mortgages and an inevitable debt crunch, I made much of the fact that we had experienced four years of rising markets and that a setback was inevitable at some stage. We had that setback but from a much higher level than we started the year. We have seen a very reasonable recovery since.

Emerging markets showed every sign of decoupling from the US as the year progressed. They looked to me the most vulnerable markets to any general shake-out but their resilience has been remarkable, due in no small measure to the rapid rise of consumer spending power in many of these nations and to the fact that a number of them are rich in natural resources.

This was the area that bailed out many managers. Examining the individual constituents of the FTSE 100 reveals that at the top of the table are mining companies like Rio Tinto, Vedanta Resources and BHP Billiton sitting alongside the likes of Cairn Energy, BG Group and Tullow Oil with their oil and gas reserves. The best performers have nearly doubled in price but many others have delivered rises of 40 per cent or more. This is what has held up the index.

We needed stars like these to compensate for the losers. Builders, banks and property companies were last year’s tail-end Charlies, with plenty of household names losing 30 per cent or more in value. The worst performer, Taylor Wimpey, more than halved in price. Northern Rock started the year as a FTSE 100 constituent and had lost more than 90 per cent of its value by the time it was relegated.

None of which gets us any closer to determining what 2008 might have in store. If last week’s market behaviour is anything to go by, there are enough dark clouds on the horizon to keep investors on the sidelines – initially at any rate. Tokyo tanked on the higher oil price and deteriorating economic conditions in the US. Our own market seesawed, driven by the winds of a depressed high street and continuing credit crunch.

Caution remains the watchword but equities are far from written off in the main. Barclays and Bedlam list them as the asset class of choice and few firms are forecasting a lower finish for the FTSE 100 in 2008. Perhaps they are just talking their collective book but the rise of the East and undemanding valuations suggest that being out of the market could be just as risky as being in.

Do not expect an easy ride. Volatility will continue and the variation in performance between shares and sectors, let alone asset classes, looks like testing managers like never before. If one prediction seems safe, it is that 2008 is unlikely to be boring. I shall watch the way the market moves in January with interest.

Brian Tora is principal of The Tora Partnership


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