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Daily Telegraph: Farewell to a year that gave us a good rate of interest

EXTRACT: A year which began with Russia cutting off gas supplies to Ukraine and ended with it strong-arming Shell to cede control over the country’s biggest oil and gas project reminds us that markets should price not just reward but risk as well.


Business comment
By Tom Stevenson
Last Updated: 12:32am GMT 27/12/2006

It is only natural to believe that we are living through what the Chinese call interesting times. Without the benefit of a historical perspective, changes can feel more momentous than perhaps they really are.

In some ways, however, 2006 does seem to have been a more than usually “interesting” year. In technology, the environment, public policy and financial markets there has been plenty to fill these pages.

advertisementThe last 12 months have seen the internet finally fulfil some of the promise that fuelled the dotcom boom in 1999. At a parochial level, the exponential growth in the reach of high-speed broadband and the rapid change in the way we consume media present enormous challenges and opportunities to groups like the Telegraph.

More importantly, I believe they herald the arrival of Marshall McLuhan’s global village, which has implications for how we live our lives and see the world. It could be one reason for the rapid rise up the social and political agenda of environmental concerns in 2006. The contribution of the Stern report on the economics of climate change, although it arguably told us little that was genuinely new, will be to have driven home to us the reality of the “carbon web”.

The way we earn money, and consume it and invest it are related. Crucially, we are starting to understand that we sink or swim together. The world’s biggest investors are waking up to these links, and businesses too. The more thoughtful see opportunities as well as threats. Some politicians have caught on, although Gordon Brown’s half-hearted nod in the Pre-Budget Report to these burning economic and social questions was disappointing, if not unexpected. From the parched river-beds of Australia to the wheat trading pits of Chicago and the wind farms of the Thames estuary, the environment appeared on all our radars in 2006.

But the speed with which Stern fell off the front page again suggests we’ve hardly begun to work out how to achieve sustainable prosperity.

The environment is not the only area where 2006 left more questions than answers. If the Stern review highlighted the Government’s woeful ability to do nothing when it should act, other areas of public policy have highlighted the possibly greater danger of it trying to fix what simply ain’t broke.

The disaster of our pensions has been a long time in the making but the Turner report and soaring deficits have kept the spotlight on this looming catastrophe. The ongoing impact of Gordon Brown’s tax grab on dividends in 1997 and the regulatory squeeze from the 2004 Pensions Act, combined this year to sound the death knell for the final salary pension scheme that used to be the envy of Europe.

2006 will also be remembered for the continuing strangulation of business with red tape, the growth of taxation and the return of big, intrusive government. Daily reminders of an inefficient, bloated and unreformed public sector and the insistent tick of the state sector pensions time-bomb make it hard to look back on public policy this year with any enthusiasm.

Despite all of this, 2006 has been a champagne year in most markets. To everyone’s surprise, investors re-discovered their appetite for risk, pouring money into some of the world’s less well charted investment waters. The Indian stock market, for example, soared and the prices of a whole range of commodities from copper to uranium and orange juice have continued to defy the sceptics. The jury remains out on whether this boom is the early stages of a super-cycle or a bubble waiting to burst.

The rise in the UK stock market is also a measure of the positive face of the inward migration that took the Government, if no one else, by surprise. In the short term, the benefits of throwing our doors open to half a million, often highly skilled, east Europeans have been to put a lid on wage inflation, boost profit margins, keep interest rates lower than they would otherwise have been and to fuel a continued boom in the housing market. The longer-term pressures on social services and the environment and the creation of an underclass of comparative unemployables are yet to unfold.

On one level buoyant markets look unsustainable and few in the summer would have predicted the strength of the rebound from the inflation and growth panic in May and June. I would be surprised if the party were to end soon, however. The rapid growth of private equity has fuelled a takeover boom not seen since the late 1990s, and our doors have been opened as wide to foreign bidders as to migrant workers. Again we won’t know if this matters until it’s too late to do anything about it.

With the mid-year market wobble a distant memory, multi-million-pound City bonuses hitting the headlines and the housing market building up steam once more, it all seems a little frothy to those of us with Eeyore-ish tendencies.

A year which began with Russia cutting off gas supplies to Ukraine and ended with it strong-arming Shell to cede control over the country’s biggest oil and gas project reminds us that markets should price not just reward but risk as well. There’s plenty to be thankful for – the hurricanes stayed away, the Amaranth hedge fund blow-up remained an isolated incident and the oil price cut us some slack.

Next week I will look forward to 2007, which I expect to be altogether more challenging – and no doubt “interesting” too.

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