Personal finance: Plenty of bull in the City

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The Independent Online
It is remarkable to regard the optimism of City pundits for 1998. Given continuing turmoil in South-east Asia, and the fact we are three years into the domestic bull market, you would have thought a degree of caution in order. Yet a straw poll of the great and the good in the Square Mile showed all but one forecasting higher markets at the year end. Actually, the only person to predict lower share prices does not work for a big City house, so you could say the industry professionals are unanimous in believing the bull run has further to go.

I hope they are right. Not only will it be good for bonuses, but it should not do personal portfolios any harm. But the reality this year is that price movements are more difficult to predict than usual. Pressures arise from a number of different areas and it is hard to imagine markets skating between the various hazards without being upset, at least in some measure.

The big mistake by forecasters in 1997 was not predicting the continued bull run for US equities and the dollar. The fact that we in the UK outperformed America is less important in global investment terms. The US stock market accounts for very nearly half of world stock market capitalisation. And in America the "Goldilocks" scenario - an economy neither too hot nor too cold - proved to hold good. The porridge may be a different temperature by the end of this year, though.

There are plenty, like Professor Tim Congdon, who consider inflation the real enemy. Labour costs are set to rise in the US. Everyone wanting a job in America can probably have one, such is the strength of the employment market - but competitive pressures seem certain to emerge, particularly from the Far East where successive devaluations will deliver huge price advantages as the year unfolds. Asian problems will contribute to a slowing in the world economy, so deflation looks just as big a problem for the future. The pundits must hope we can continue to weave our way between these two particular perils.

Markets believe deflation to be the most likely outcome, if bonds are anything to go by. The strength of fixed interest markets around the world was remarkable in 1997, with only the aftershock of the Asian crisis reminding Third World debt investors that risk carries a premium. Equities were remarkably composed. While the excesses of Asian countries were hardly likely to be reflected among developed nations, the sharp falls in currencies and share values served as a reminder that markets can move into reverse very swiftly these days. Global money flows ensure corrections take place fast!

Perhaps we all have a vested interest in the main markets delivering reasonable returns, but if that were the case, Japan would not have been the dog it has been. Again, rather interestingly, City experts all expect a recovery in the fortunes of the Nikkei Dow. Even the outsider thought this market offered reasonable value, although he warned that bottom fishing in the Japanese sea was perilous.

Personally, I think 1998 will be a difficult year. The first conventional Labour Budget is unlikely to deliver cheer to investors, while signs of upward pressure on wages should mean no early easing of the interest rate policy adopted by the Bank of England. Institutional cash flows, and a belief that the UK offers a cheap way into Europe, may prevent our market from suffering a severe setback, but I would be surprised if we saw much in the way of overall profit.

But a stock market is a market of stocks, so there will be winners and losers as the year unfolds. Who would have guessed the best performing FTSE 100 company to be British Gas? Banks did well during 1997, even if HSBC lost most of its outperformance as Far Eastern pressures built. The coming year may not see such wild swings, but I believe it will be a year when a defensive posture will prove sensible.

I hope 1998 is the year when smaller companies return to favour, although it is hard to see them bucking the trend of recent years. Concentrate instead on the well-managed international companies that will to be of interest to global investors. And spend as much time enjoying yourself as you can - just in case the Asian tiger turns nasty before the year ends.

Brian Tora is chairman of the Greig Middleton investment strategy committee