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The food chain

The battle to which I referred last week does appear to be continuing, albeit sotto voce rather than roaring. Markets are swinging around, caught in the tides of news and data.

Column inches are devoted to explaining why this manager considers a buying opportunity par excellence is being created or why that financial expert believes Armageddon lies just over the horizon.

One of the apparent negative influences is the onset of food price inflation. This appears to be driven from both growing demand – the world population is rising and the developing nations such as China are improving their diet and increasing their calorific intake – and shrinking supply.

It is China that appears most at risk as a result of these price pressures. It is here that rising prosperity is leading to a fast increase in spending on food. With China now competing in world markets for grain, the price is under even greater pressure, which the authorities in China have been able to suppress temporarily by releasing part of the domestic stockpile. But this can only be a short-term fix. Food price inflation is becoming a factor elsewhere in the world as well – and it is the poorer nations that are bearing the brunt. In Mexico and South Africa, there has been social unrest as a consequence.

Even the good news recently comes with a health warning. US retail sales figures for May, published last week, saw the bond market take yet another hit as it was confirmed the consumer remains in good heart despite high petrol prices and the parlous state of the housing market. Fixed income has been going through a torrid time of late – a natural consequence of deepening fears over inflation and interest rates.

Meanwhile, we appear to be running out of oil faster than we thought, according to a report published last week. Rather than having enough of the black stuff to tide us over for the next half century, it seems production is likely to peak in around four years and then go into steep decline. With China’s fast-growing appetite, further price rises look inevitable. It’s enough to make you turn sellers of equities.

Which apparently is just what British investing institutions have done. According to the Office of National Statistics, pension funds dumped £17bn-worth of shares last year and life companies more than £5bn. All in all, some £30bn of equity assets were sold in 2006 despite inflows to these very same institutions of £90bn. The unit trust industry, which overall had a good year, succeeded in hovering up less than £1bn over the same period.

Given that 2006 was hardly a bad year for domestic investors, you might wonder where all these shares have gone. Some, of course, have been “retired”. Corporate activity was strong last year and it was foreign predators and private equity that were at the forefront of the bidding frenzy. But foreign investors have also been adding to there stockpile of UK shares. Someone somewhere has got it wrong.

Brian Tora ( is principal of The Tora Partnership.


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