Struggling markets make predictions hard for future investment

Published on Friday 20 November 2009 18:36

LAST month, the Investment Club's paper and pencil analysis (Papa) was looking for a resolution of the current financial market trends, up or down.

It thought this would come about if the FTSE and the Dow broke decisively above papa's predicted tops of 5,121 and 10,398 respectively, along with bonds going down. Bonds did go down a bit, but the Dow was weak too and the FTSE100 followed suit.

Could the club divine the market's direction from the economy's health before placing bets?

Unfortunately it is very hard to get at the truth regarding the economy because government, economists and journalists seem to have a vested interest in talking the economy up instead of presenting fact.

For instance, newspapers reported that new industrial production figures were expected to show that manufacturing rose by 0.1 per cent in August compared to July. Manufacturing output actually fell in August by 1.9 per cent on July's figure.

The British Chambers of Commerce forecast that third-quarter gross domestic product would come in flat or to have registered a small increase, meaning Britain is on the brink of emerging from recession. When the figures were announced, the economy shrank 0.4 per cent between July and September and Britain is now in the grip of the longest recession on record.

When the facts are studied the economy is still sick. A prisoner's pallor is being kept at bay only by government injections of funds either through cutting VAT or giving car buyers discounts on new for old cars. However, VAT is going back up to 17.5 per cent in January and the 400 million cash-for-bangers fund should be depleted by March 2010.

In addition, Chancellor Alistair Darling is set to reveal spending cuts in November's pre- Budget report. This should ensure the patient stays in the recovery ward a little longer. But does it follow that markets will deteriorate?

Not necessarily, because Darling has announced the government is to throw another 39.2 billion into RBS and Lloyds.

These vast sums of money should bring down gilt prices in the near future but may not push up stockmarkets because Lloyds is to suck 7.8bn out of the investing public's buying power via a rights issue.

Unfortunately, looking at the economic numbers has not resolved what investment strategy the club should now adopt.

Papa is not very helpful as its analysis is still looking for the Dow to reach 10,398 before falling. Its gilts analysis is unhelpful, as War Stock is stuck in a no-mans land between 72.50 and 80.

However, if War Stock breaks below 72.50 it might be on the way down to 66. If gilts plunge then the club is going to try a new tack and will spend all its cash buying 4.25 per cent Treasury Principal Strip 7 December, 2055 to get a bit of leverage into the portfolio. If stocks rise, the club will not risk any money but wait for a pull-back before considering a share punt.