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Test of nerve

I find investors’ reaction to recent news puzzling. It is clear the recession is deeper in this country than was previously thought and that indebtedness has reached dangerous levels – with worse yet to come. Yet, while we have given up some of the gains achieved since the March lows, as soon as a pullback in share prices takes place, buyers emerge.

It is possible the weight of money effect is in operation. Despite the credit crunch and the demolition of banks’ balance sheets, there does appear to be plenty of cash around. Much of it stems from abroad. Not every part of the world was hit as hard by the financial upsets as the Square Mile and, for some investors, given the weakness of sterling, London is looking good value just now.

This particularly applies to top-end property, where the fall in price to a buyer based in Swiss francs or euros – or even dollars – has been as much as 50 per cent over the past two years or so. And London shares are truly international in aggregate. There are plenty of companies in the FTSE 100 index for which the domestic economy is an irrelevance.

By the time you read this we will have seen the Indian Budget. I doubt it will make the front page of even the financial sections of the papers but we will learn how fast the Indian economy is growing. As a preliminary to next week’s announcement, the finance minister has prepared a report suggesting growth of 7 per cent this year, accelerating in subsequent years. The two-speed global economy is upon us.

Sadly for Britain, politics is getting in the way of prudent economic management. A Government – perhaps more aptly, a Prime Minister – with its (his) back against the wall is creating a scenario which seems certain to generate years of austerity. This cycle, once in place, will be hard to overturn. And the changes that really do need to be ushered in – like restricting Government employee pensions so that they look more like those of the private sector – will become very tough to implement.

So I view the next few years with at best caution, at worst alarm. This is why I am nervous about the market – except that elsewhere, green shoots really do seem to be popping up all over the place. If there is one consequence of the excesses of recent years in the Anglo-Saxon economies, it must be to speed the new order on its way. Perhaps the thirst for emerging markets is not as risky as it sometimes looks.

It could well be that our stockmarket travels in one direction for a little while and our economic performance in another. Still, as the cost of bribing the electorate ahead of the next general election becomes clear, even the most confident of investors may find their nerves tested.

This may not be a summer of discontent but it may prove to hold a few awkward moments. Let us hope the weather stays on side to cheer us through.

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

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