Investment Commentary - Shares turn around but don't let euphoria carry you away...

Brian Tora is one of the City's most respected financial commentators. Previously he held the post of Investment Communications Director at Gerrard Investment Management Limited. He writes a regular monthly column on investment issues for Moneyextra.

OK, I spoke too soon. Never say never is good advice in this business. A month ago the market was having a touch of the jitters. As we reached the end of the tax year, the recovery has been remarkable, with shares in this country now at their highest for over 6 years. All the earlier losses have been made up. But problems remain, though. And there are one or two other things to worry about now as well.

So perhaps the first subject to tackle is why shares have turned around so convincingly. Tax year-end buying is quite common. The run-up to 5th April is traditionally the peak individual savings account (ISA) selling season, though why investors wait until the end of the tax year before getting their cheque books out beats me.

I know the benefits have been eroded over the years, but personally I bought the 2006/07 ISA in April last year, thus gaining a full year of those tax advantages that remain. Whether I'll be sufficiently confident to act with such alacrity this year remains to be seen.

For a start, further interest rate rises on both sides of the Atlantic look a distinct possibility. Inflation remains a concern to central banks. Indeed, the real pessimists have been muttering words like stagflation when it comes to the US economy. This is a term I have not heard since the dim dark days of the 1970s.

Part of the problem appears to be that imported disinflation (only the Americans could coin such a word) from China has come to an end. The growing prosperity of the world's most populous country has led to rising labour costs. The good news is that this means the delivery of the three billion new consumers, forecast to replace the declining populations of the developed West, is on track. The bad news is that prices are likely to rise from here.

So we may not yet have seen the peak of the interest rate cycle. Contrast that with the euphoria that helped turn the market just a few weeks ago. US Federal Reserve Chairman Ben Bernanke was toning down his language with regard to the need for further interest rate rises, while one member of the Bank of Englands Monetary Policy Committee actually voted for a rate cut. With hindsight it is easy to see the way in which stock market turmoil might have influenced the decision.

11 April 2007 © Moneyextra.com

back

Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.