Investment Commentary: Strong nerves needed

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.

You need strong nerves to ride this market. Daily swings are of a magnitude that demonstrates just how hard fought the battle is between the bulls and the bears. In November it looked as though the bears were gaining the ascendancy, but there were still buyers around to snap up bargains on bad days. The belief that central banks will step in to head off a recession is deeply ingrained in some quarters.

The signs are not encouraging, though. In the USA we appear to be heading towards the first consumer-led recession for the best part of a generation. Back home all the indicators suggest the housing market is about to turn down, perhaps sharply. This in turn seems certain to impinge upon spending patterns. The part the poor state of the housing market in the USA has played in the economic slowdown there will not be lost on observers of the domestic scene.

In conditions like these where is the poor private investor to shelter from the winds of adversity that are blowing through financial assets? Not in commercial property funds it seems. The number of these highly popular vehicles that are restricting redemptions is growing. And you can understand why. Commercial property is not a very liquid asset, so when investors want their cash back managers can have trouble raising the necessary funds.

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Even the Far East has been surrendering some of the extravagant gains delivered earlier this year. This may be no bad thing, given the bubble-like quality of the Chinese stock market in the summer, but it still removes a haven for investors anxious to stay committed to shares. And the retreat there is taking place despite an apparent lack of contagion from the Wests credit crunch.

The real worry is the depth and length of any recession that a combination of tighter credit conditions, less spending power, thanks to incipient inflation, and falling house prices induces in America. So far there is some evidence that the emerging world is decoupling from the USA and Europe, but it is hard to see manufacturing nations like China escaping entirely from a lessening in consumer demand. This is not a time to try to be too clever in the investment world.

Of course, you could simply leave your money on deposit with a bank. Except that doubts have been raised as to the security of these bastions of capitalism. Witness the way in which inter-bank rates have soared recently. UK banks seem less than willing to lend to each other at present. If they are harbouring doubts - and they should know - then who are we to take the seemingly fortress-like quality of these institutions at face value.

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From all of this you might detect that I find markets as tricky as I ever have at present. That there is plenty of cash around for investment at present is undeniable. Much of it stems from those nations that have benefited from the enfranchisement of the developing world. Whether through the exploitation of natural resources or of cheap labour in manufacturing and service industries, the explosion of wealth in these nations is creating a new world order.

But I cannot ignore some of the warning signs that are emerging. This winter will, I suspect, test the ingenuity of central bankers and world leaders alike. I can take some comfort from the statistical probability that December tends to deliver positive returns to equity investors, but I will be watching events and market movements with a greater degree of attention this year. Care and prudence should be your watchwords in this festive season.

Read last month's: Investment Commentary: Forever blowing bubbles?

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05 December 2007 © Moneyextra.com

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