Investment Commentary: Reasons to be cheerful?

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.

And so the first quarter of 2008 draws to an end. To say it has been a difficult period for investors would be an understatement. Stock markets have finished lower, but it is the wild swings that have been taking place that are the source of greatest concern. Not just on the downside, either. The news that JP Morgan had increased the price it was prepared to pay for Bear Stearns five-fold caused a 200-point jump in the FTSE 100 Index.

The ripples from the credit crunch remain centre stage. More liquidity from the central banks failed to soothe the market, as evidenced by the jump in LIBOR rates towards the end of last month. It seems that investors are expecting more victims, while banks themselves continue to view their competitors with suspicion. Some must be regretting recruiting the rocket scientists that devised the complex instruments at the core of the problem.

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Then there are the twin concerns over rising inflation and slowing economic activity. Soon we will have the numbers for US GDP. Of course, a contraction in the American economy for the first quarter of this year will not mean a recession has necessarily arrived. We'll need a second down quarter for that. It is unlikely to give much cheer for the market, though, if this is indeed the outcome.

As for a rising cost of living, while it is undoubtedly exercising the minds of members of the Monetary Policy Committee, it is in fact the emerging world most at risk from higher energy, fuel and food prices. These primary influences are a much bigger factor for the developing world, than the West. But it does now look as though all the restraints on inflation from cheaper imported goods are coming to an end.

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What does all this mean for stock markets? The uncertainty engendered by continuing problems in credit markets and a likely slowing in global economic growth seem likely to unsettle shares for some little while. But it is not all doom and gloom. Inflation, while generally unwelcome, may help speed the unravelling of what has been perceived as an asset price bubble in property. And not all investors are bearish.

I was heartened to read the comments of Jeremy Tigue, investment boss of Foreign & Colonial, a major money manager. He expects a surge in share prices on the scale of that seen back in the mid 1970s when inflation was again a major issue. The circumstances today are rather different, though, so I would not be backing on the sort of performance delivered by shares in 1975, when the FT All Share Index rose by 150%.

The good news from my perspective is the level of disagreement amongst stock market watchers. Divided views are healthy in my experience. It is when a broad consensus comes into being that you need to mind your eye. So perhaps 2008 will turn out not to be the financial Armageddon that the dyed-in-the-wool bears are suggesting and the likes of Mr Tigue will have their confidence reinforced.

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I cannot see that this next quarter will be easy, though. First quarter earnings from corporate America will be being published soon and these are bound to be looked at most closely. But this is an Olympic year and traditionally this provides a boost to the world economy. Perhaps 2008 will be a year of two halves, in which case it might prove a prudent move to pick up quality shares on bad days. That will be my strategy.

Read last month's: Investment Commentary: Up or down for equities?

02 April 2008 © Moneyextra.com

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