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Torrid timing

Listening to Jupiter’s Edward Bonham-Carter giving his views on the state of the stockmarket on BBC Radio 4’s Today programme reminded me how misleading indices can be. The FTSE 100’s recovery to within a few percentage points of last year’s highs masks the fact that some sectors have suffered greatly. The good performance of mining and oil shares has helped boost the overall level of the index.

The weight of money swinging in and out of these sectors is adding to volatility. A rise to comfortably over 6,300 at the beginning of last week was led by mining companies. The reversal of fortune brought about by the oil price breaking into new high ground the following day saw miners leading the index down far faster than they had helped it rise.

This makes the market a dangerous place for index trackers. The vulnerability of the index to a change in sentiment looks considerable. Exchange traded funds plotting a general index might once have appeared a suitable solution but greater inventiveness appears necessary. As it happens, there has been a proliferation of more sophisticated ETFs coming on the market. A number of these are plotting the commodities that have become so popular among investors. Call me old-fashioned but when everyone jumps on a bandwagon, surely it must be time to head for the exit? Yet the conventional alternatives are looking peculiarly dangerous.

Of course, you could always default to cash. I remember a stockbroker remarking that cash is the most dangerous of options. Not only does this asset class include a guarantee that it will underperform inflation but the absence of any chance of achieving a windfall profit means that there is an opportunity cost present as well. The only argument for holding cash is that you want to keep your powder dry and commit at a later stage.

This might work in a deflationary environment but we are living in a world where inflation is more of a threat than it has been for a generation or more.

To believe in an investor’s ability to time an entry into the market at a more favourable level, other than on a purely random basis, is total hokum. I know, I’ve tried it. However nervous I feel about the distance that the major market indices are gaining over the March lows, I cannot subscribe to the Armageddon theory espoused by the arch-bears.

Last week saw the Bank of England distance itself from the Treasury’s assessment of likely economic trends and declare a prolonged period of sub-trend growth to be in the offing. Perhaps it is. I don’t know. Neither does the bank. The fact remains that the stockmarket appears out of sync with the views of those charged with governing our economic well-being. Even the head of Europe’s central bank has been keen to emphasise the problems that might still be lurking. In part, this is because there is still enough investment cash around to create demand. One side or other has it right. My money is on the market – eventually.

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

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