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2007! What a year that was? Will we see improvements in the coming year or will all the bad influences combine to cause more serious problems? Given that stockmarkets around the world are still generally positive over 2007 spectacularly China and Brazil and to a much lesser extent, the US, UK and other developed countries, what chances for progress are there going forward? I somehow fear that the medicine has not yet worked. A downward shock of 10 to 15 % or more could yet occur when all the dirty washing is exposed for all to see and weakness in an overstretched economy surfaces. The credit crunch is biting but the effects have yet to manifest themselves, so hang on to your hats and your cash. Many lingering effects of lower profits and other symptoms of financial weakness will only show with time and the next reporting season is still some way off. The markets are discounting problems in banks, mortgages, house building, commercial property, retail, leisure goods and services to name the most obvious but some of last years high flyers are likely to feel the cold wind as the economy suffers. The interest rate weapon is being used aggressively in the US and is likely to be similarly vital in the UK although the ‘steady’ MPC may not move as swiftly as across the pond. The MPC generally works more carefully than the Fed but panic is a hard taskmaster so expect several cuts here in the next 12 months and an easing of problems for cash strapped, company balance sheets.
In the past, the Christmas season has produced bubbly markets as the cash rich traders and workers with heavy bonuses spent their money on shares pushing markets upward. Not this time. So judging by past history, weakness will prevail to mid-year and beyond I believe. It does not mean that bargains amongst individual stocks are not available but care has to be taken and a waiting game might be most prudent.
Our leader is on the rack as his self-styled financial prudence starts to unravel and speculation is rife that Darling and Brown could be the shortest serving Chancellor and Prime Minister respectively. No tears for them.
Two particular trends might become dominant and help markets. The first I see as continued Merger and Acquisition activity. Where a target is reduced to relative peanuts and a predator can raise the cash then agglomeration will continue. The second trend that will continue is the strengthening of Asian stockmarkets where internal economic activity in particular in China and India continues apace and the rampant growth of Russia as an energy powerhouse while Brazil continues expansion as a resources rich trading nation. Even the Middle East, home of trillions of petro dollars is going to be a force to be factored in to economic calculations in future as they reverse historic investment flows.
Looking forward, commodities will weaken especially oil, and base metals. Gold is a difficult prediction to attempt because current worries suggest it will go somewhat higher for a few months at least but later it could retreat if the US economy settles without a serious crash. There are signs that the US will get a tremendous trading boost from the low price of the dollar and their lower interest rates will kick in quickly. Whether they will experience more than two quarters of reduced activity (technically a recession) will be seen as the year unfolds. When America sneezes, the World catches a cold is still likely to hold good.
Mobius club is heavily in cash after a difficult year. I feel we should carefully sift through some of our recent failures, such as Persimmon and Ashtead, during the coming months. As they eventually recover, which I expect, they should prove to be great bargains for the long term. The club has decided at the AGM to look at some mechanical portfolios which are differently constructed with some more checks and balances with the aim of avoiding the pitfalls of last year. We shall look forward to the next rising market whenever it arrives.
The annual Christmas dinner was held at the Grey Ox at Hartshead. We had a good attendance and found the whole experience very good. An impressive meal, with cosy atmosphere and eager service. Nice to see Tony and Rebecca again and welcome new member Richard. It seems likely that we will use the venue again next year.
Happy New Year to all.
Martin Longman - Acknowledgements to Daily Telegraph and FT.