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Swing factor

Last week was something of a media fest for me. Please do not think I am boasting, it was just that many of the usual commentators were on holiday. I am still up for the odd assessment or two of the state of the markets but lacking the ties that demand a break during the school holidays (my children being of an age when they should be looking after me, rather than the other way around), it fell to me to fill in for the younger masters of the sound bite.

Not that I am incapable of delivering my own pithy comment from time to time. Challenged on a prime-time quality radio programme to account for the relative calm-ness of markets and whether the European Central Bank’s decision to buy stacks of Spanish and Italian bonds had brought about this state of affairs, I had to respond that it depended on your definition of calm.

I mean, can you really describe a market that earlier this month suffered a swing of close to 8 per cent intraday as calm? Not so very long ago, there was a period running into several years when volatility was subdued. No market movement exceeding 2 per cent in a single day was recorded. That is what I term calm. Swings of a magnitude of 2 per cent plus seem to be the rule rather than the exception right now.

Volatility is to a great extent a measure of uncertainty. Shares and markets swing up and down when the future direction is viewed as clouded. That is certainly the situation today. Sovereign debt anxiety and a lack of conviction over the likely direction for developed economies are leading investors to fight shy of commitment. This allows markets to fluctuate at the whim of gossip and rumour.

If businesses detect the cold winds of recession blowing across their balance sheets, they have little choice but to retrench, which may result in redundancies

This state of affairs may be exacerbated by the thinness of trading in a traditional holiday period but the real issue remains the ability of companies to deliver to expectations in a fickle and uncertain world. Thus far they have proved remarkably adept. The corporate world proved itself far nimbler and much more determined than our political leaders when the financial ordure hit the global fan.

But a prolonged period of economic stagnation will undoubtedly hit company profits. Worse, it could prove self-feeding. If businesses detect the cold winds of recession blowing across their balance sheets, they have little choice other than to retrench, which may result in redundancies. This in turn contracts the ability of the consumer society to stimulate demand. What an integrated world it is in which we live.

In the meantime, assets such as gold and government bonds – or at least those issued by countries where there is an expectation that default will not arise – remain in demand. In an environment where it seems investable cash continues to expand, it is a pity some cannot be diverted to restore faith in equities. These, after all, are expected to provide the best long-term returns.

Unfortunately, investment time horizons are short and contracting. At times like this, I am tempted to set out my investment stall and stick with it. Would that life were that simple but I reiterate that markets have delivered little overall for close to a generation. If the final, proper breakout is not on the upside, I fear it will be because the world has finally changed for good – but not for better.

Brian Tora is an associate with investment managers JM Finn & Co

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