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Swings and roundabouts

Have we seen the worst? There is evidence of bottom-fishing on bad days but some sectors have been so comprehensively slammed that real value looks to have emerged.

Retail sales figures for June told us what we knew already – a combination of higher inflation and falling house prices is starting to damage consumer confidence.

Such evidence is likely to see the Bank of England stay its hand on interest hikes. Just as the Fed starts to take inflation more seriously, we could see an easing of the hard line favoured by the bank’s governor. Providing cost of living increases do not lead to inflation-busting wage settlements. So far, the line seems to be holding, which is why I continue to believe that governments and central banks will find accepting modest inflation preferable to a recession. But the risk is that “modest” becomes uncontrollable. This is Mervyn King’s worry.

Inflationary pressures building in the emerging world are, in part, due to food being a more important element than in the West but higher wages cannot be ignored. Economists talk of two billion people joining a global middle class in the first quarter of this century and that is because they are earning more.

The deflationary effect of manufacturing shifting to countries such as China has run its course. From now on, we will be subject to more usual economic cycles.

The past year has proved a testing time for investment managers. Traditional approaches have failed. The list is long of previously star managers whose funds have slipped.

Nor has there been any sustainable comfort from alternatives. Some of the newer asset classes have proved just as volatile and wealth-damaging as some equity sectors. Hedge fund managers have enjoyed mixed fortunes. Perhaps only momentum managers have seen their approach vindicated – and that is testament to the wild swings.

Just look at the behaviour of some shares. Barclays has fluctuated between near £8 a share to less than 240p in little more than a year. It was easy to pass up the opportunity of new shares due of the fall in the share price below the issue price. Within a week, the shares had risen by nearly 50 per cent.

Even resource stocks have had a rough time recently. Many mining shares have shed a third while oil majors are comprehensively off their best. Emerging markets, too, have suffered. These are markets where you need to nimble, lucky and patient.

I read conflicting forecasts from two major US investment banks. This dichotomy of opinion convinced me that my approach of dripping money back into the market on bad days while maintaining a wide asset diver- sification is as sensible approach as any. And I fear there are more bad days to come.

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

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