Investment Commentary - Rain stopped play?

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.

May might have been better than we had any reason to expect, but June was altogether trickier. True, there were no real sell-offs, although bond markets did give some cause for concern, but overall shares traded lower. Not a lot lower, it has to be admitted, but there were a few difficult days. A bit like the weather, the outlook for shares felt cloudier than we have any reason to expect at this time of year.

June is generally a quiet month. The first of the half year profit figures for those companies that report to a calendar year end do not start to see the light of day until the end of July. Economic statistics continue to emerge uninterrupted by seasonal issues, but with holidays on the mind of many of those expected to react to the data, we have become used to a less bumpy ride than that delivered by shares recently.

The domestic economy has given a few reasons for caution, although that is not the crux of what has been behind the growing debate on what the future may have in store for investors. The wet weather has had an adverse effect on retail sales. Witness the problems faced by the owners of New Look as the last of the private equity bidders withdrew from the bidding in the light of a deteriorating high street. Mind you, as the sellers are also in the private equity game, it is hard to feel too sad over the outcome.

But the refinancing that will be necessary as a consequence could catapult the core issue facing markets into the limelight. There is mounting nervousness over the state of the credit market worldwide. Problems have arisen from a number of quarters. In the US, the downturn in the housing market has caught out a number of lenders at the bottom end. The so-called sub-prime lenders have been forced to write off large sums from their mortgage books, with some defaulting.

In turn this has impacted on some hedge funds which have participated in this lending by buying packaged loans. Aside from affecting those invested in the funds directly, the problems so created draw attention to the fact that, with ever more complex investment instruments being created, where and how collateral damage from an asset price collapse might arise is becoming extremely difficult to predict.

Then there is the carry trade - borrowing in a currency with low interest rates and depositing in one where the returns are better. Better, that is, unless currency movements remove the added value by delivering a foreign exchange loss. Estimates as to how much money may be riding on this trading opportunity range from the worrying to the downright scary. An implosion caused by adverse currency movements could impact on the wider credit market.

05 July 2007 © Moneyextra.com

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