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Taking a prudent approach to the markets

I would expect the weather to be getting warmer and the markets beginning to cool but so far there is no sign of either happening

Brian Tora MM blog side

Last week was bound to be a rather unusual one for the retail investment industry.

A short week, because of Easter, it also marked the end of the tax year, so those with client facing responsibilities were bound up with ensuring capital gains tax positions had been squared, Isas properly funded and pension contributions were up to date. As a result, what was actually happening in the market probably passed them by as a result – not that much did happen.

This lack of action was itself something of a surprise.

Of news there was plenty. The Cypriot finance minister resigned (well, he had been chairman of Laiki Bank), North Korea threatened a nuclear conflict and our own welfare system suffered a radical shake-up. Oh, and the British Chambers of Commerce told us that life was not as bad as we feared after all and that the service sector would rescue us from a triple dip recession.

With such a mix of events taking place, perhaps it is just as well that investment managers and advisers responsible for shaping an individual’s portfolio should have their minds occupied elsewhere.

Those whose task it is to manage investment, life and pension funds had no such distraction, though, so I marvelled at the robust nature of world markets. While we were still short of recent highs, it was not by much. It seemed bad news was being ignored.

Of course, markets are about the future, not the present, but they are emotional, rather than rational, places in which to operate.

The news last week that unemployment in the single currency zone had reached a record high, that the German economy was stagnating, while France had suffered the biggest contraction in four years might have further unseated the Euro, but it held remarkably firm.

I know I suggested recently that investors would be better off sitting on their hands, but that is just what appears to be happening.

So we enter spring – if you can call it that – with markets enjoying the effects of more buyers than sellers and confidence seemingly undented by a further Eurozone crisis, indifferent economic news on a variety of fronts and rising geo-political threats.

It feels like the reverse of the weather. Spring, with its longer days and advent of British Summer Time, should be a period of warmth and flowering. Instead it’s cold and barren. The market should be cowering in the face of widespread uncertainty. Instead it’s remaining remarkably buoyant.

There are two possible outcomes from such an ambivalent background.

Either the market will crack as one or other of the threats that lurk in the background turn into a clear and present danger, or we muddle through – much as we have so far.

I know which I prefer, but even a positive result from all the problems circling investor sentiment need not mean share values continue their upward path. Caution still seems preferable to chasing the market.

Meanwhile, the fiscal drag which is expected from the pegging of the inheritance tax threshold is prompting a renewed drive from promoters of tax shelter products to back smaller companies and other assets which enjoy potential freedom from IHT in the future.

While I am all for paying as little tax as can reasonably be arranged through prudent financial planning, I do wonder if these schemes are suitable for many investors.

Do not get me wrong – I like smaller companies and have sat on the board of a smaller company investment trust. I hold some small companies in my portfolio, but I understand they are essentially riskier than some other assets.

The tax tail should never wag the investment dog, so promoting an investment to someone unlikely to understand the potential risks involved simply on tax grounds does not strike me as sensible – particularly with so much uncertainty around.

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


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