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Two-way tug

With the Budget known by the time you read this, I feel making any predictions on the short-term direction of markets risky. What does seem likely is that the two-way pull that has characterised the influences on investor psychology will continue for some while yet.

First over the horizon will be the first- quarter earnings’ figures from corporate America, followed by our own reporting season, which will be noticeably thinner than our transatlantic cousins. Domestic UK businesses have yet to embrace the notion of reporting four times a year. Since current conditions create the risk that you take your own temperature too often, this is probably no bad thing.

The US has already started the information flow that will lead to instant judgement-making on the health of the economy. Goldman Sachs and JP Morgan have both delivered better figures than many thought likely. They have helped reinforce the rally in Wall Street which has seen the S&P 500 index rebound by more than a quarter over recent weeks. The simplistic view of why confidence is returning to investors over there is the US was first into the global recession and will be first out. Would that life were that simple.

A prerequisite of a more robust economy over there must be at least the start of a recovery in the housing market. Of that, no sign yet exists. Meantime, lots of all the other numbers – like unemp- loyment – continue to disappoint. The two- way pull continues.

In China there are some indications that a recovery is under way but not on the export front. At a lunch organised to profile a leading international mining group last week, I learned that demand for the type of steel used in infrastructure projects was holding up well over there but the steel required by car or white goods manufacturers was still not needed.

Recent figures suggest a 6 per cent rise in China GDP has been achieved. Given the way that many of its customers must have retrenched, this seems a remarkable achievement. However, this manufacturing giant acted swiftly to adjust the inventory levels it was holding, transferring much of the pain from the global slowdown to its Asian neighbours. Economic data suggests this process is now complete.

The rebound in some commodity prices demonstrates how inelastic demand can become. This reinforces the argument that once the recession is over, the pick-up could be highly inflationary. Couple that with the effects of quantitative easing and the desire of governments to achieve a degree of debt forgiveness through inflationary devaluation and a rising cost of living must be in prospect not too far down the road.

Just when the attention is on deflation, perhaps it is reviving inflation we should be worrying about. While pensioners are concerned over the return from bank deposits, maybe it is the effect of inflation on the purchasing power of that money that should be uppermost in their minds.

The S&P may have bounced by 26 per cent but is still 45 per cent below its 2000 peak. The two-way pull will continue but long-term investors need to take advantage of the days when the bears are in the ascendancy.

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

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