Personal finance: Brian Tora column

`Governments will not allow markets to drive us back into recession'

TWICE IN the last couple of weeks I have heard Tim Congdon express concern over the prospects for investment in America and over the US economy in general. Tim, once one of the wise men advising the Chancellor (he received a CBE for his contribution to the economic debate), is chief economist of the Gerrard Group. As Greig Middleton is part of the Gerrard Group, I would be foolish to ignore his views.

Tim's concern derives from the way in which the trade deficit is ballooning in the US. He considers the growth of the deficit as a percentage of GDP to be unsustainable. Yet it is hard to see what will rein it in unless American consumers stop spending and the dollar weakens to allow their exporters a better chance in the global market. There are no signs of either happening.

Tim also considers inflationary pressures to be present, even if they do not appear in any real measure in the published statistics. In part, this is because the rules have been changed recently, suppressing the apparent inflationary trends. But these trends are clear enough in wage rates, which appear to be rising sharply. This is hardly surprising, given the tightness of the labour market in the US.

There are counter arguments. Optimists will point to the massive flow of money into the market from private savers, often using retirement accounts to invest in stocks and mutual funds. There is also the sheer power of the market, which has led in the past to the Federal Reserve Bank easing monetary policy to avoid a continuation of difficult market conditions. Tim says this approach will exacerbate the situation.

Do we have to worry about this? America has performed better than other major markets over the past decade. If you look at the recent compound growth rate of equity investment, North America heads the league tables with a near 20 per cent annual return, compared with less than 17 per cent in Europe, barely 16 per cent in the UK and an actual loss overall in Japan. US shares are expensive relative to other markets. The so-called "nifty fifty" - the 50 largest shares in the American stockmarket - have a price-earnings multiple in excess of 40, while their yield is barely 1 per cent.

The correlation in performance between our own market and that of the US is too close for comfort. It is often said that when America sneezes the rest of the world catches a cold. It seems unlikely that the US could suffer a major bear market without fairly significant knock-on effects on this side of the Atlantic. For that reason I am inclined to take the more optimistic view that governments will not allow markets to drive us back in to recession. But that may not be good for America in the longer term.

Cautious investors are endeavouring to find value among shares that do not enjoy the extravagant ratings of the index stocks and the technology plays. Fortunately there is plenty of value out there. Most companies quoted on the US stockmarket enjoy a sub 20 price-earnings multiple. Now may be the time to look at those companies rather than continue to ride the bull in the majors.

Brian Tora is chairman of the Greig Middleton Investment Strategy Committee