Wobbly market offers opportunity to buy

Serious Money: When words fail me, it is easy and comforting to reach for a well-worn cliché. When markets - particularly of the US variety - wobbled at the end of last week I was dumbfounded when many a respected analyst reached for an explanation and came up with the same answer. Buried deep within the bowels of the monthly US employment report, a much-watched statistic on wage rates had moved from a previous level of 0.3 to 0.4.

Wow. Now, I suppose when a number rises by 33 per cent you could argue that we are witnessing a rapid acceleration in whatever is being measured.

For anorak-wearers out there, the actual percentage increase in this number was actually 17 per cent (don't ask, it's all to do with rounding of very small numbers). That cliché? Equity bull markets always climb a wall of worry - meaning that stocks always go up, particularly when there seems to be plenty of reasons for them not to.

But let's not get hung up on trivia. The bigger picture is this: what went up by 0.4 per cent were average hourly earnings. This, apparently, portends the return of inflation implying, among all sorts of other things, that the Federal Reserve is nowhere near finished putting up interest rates. And higher interest rates, as we know, are bad for everybody, not least stock markets.

To be fair to the inflation pessimists (although I'm not sure that I can think of many reasons why we should be so tolerant), economic activity in the US - and everywhere else in the world - seems to have accelerated coming in to 2006. Falling US unemployment is always a disaster for the bond market vigilantes.

At the same time we should remind ourselves that the über-bear of global markets, Steve Roach of Morgan Stanley, has been warning that the "jobless" US recovery is sewing the seeds of its own early demise by not granting wage increases to employees. No extra jobs and no extra income mean no extra consumption - therefore no overall growth. But when that job and income growth starts to appear, instead of rejoicing we merely move the focus of concern to inflation. Go figure!

The idea that inflation is about to make any kind of serious comeback is risible nonsense. Independent central banks and two billion people in China and India working for less than €1 per hour will continue to guarantee that anyone who puts prices up merely becomes uncompetitive, rather than contributing to a good old-fashioned wage-price spiral.

Worry is a funny thing. Many people might think that the international situation is particularly fraught with danger at the moment. I would guess that it always feels like this. But current circumstances are not actually that bad.

As Larry Fink, the chief executive of the prominent NY investment management firm BlackRock, put it the other day: "I think the world is a much safer place than people realise." Coming from a bond guy, that is quite something. Equities are always a punt on the future. For all of the jargon and quasi-sophistication of the analysis, an investment in stocks is essentially a bet on the future turning out a bit better than consensus opinion would have you believe.

If Mr Fink is right, and I think he is, any sell-off in stocks on the back of inflation or other misdirected concerns should be taken as a buying opportunity by the optimistic investor.

One source of optimism - not shared by anybody - is the view that George Bush made one of those "Man on the Moon" speeches when he delivered the State of the Union address last week.

The moon reference is not to suggest comparisons with children's fairy tales, or Bush's state of mind, but rather to think about John F Kennedy's famous speech that launched the US mission to undertake manned lunar landings.

Bush's reference to oil addiction and a call for the US to become less dependent on imported oil was greeted, naturally enough, with considerable scepticism. Markets certainly paid it no attention: if the US is serious about weaning itself off oil, the price of crude should have collapsed.

Is the world correct to be so doubtful about the ability of the Americans to find effective substitutes for oil? The technological difficulties are well-documented and the addiction is all too real. But nobody really took Kennedy that seriously either, even though he was a much more credible president. Less than a year before the successful moon landings, prominent scientists were still saying it couldn't be done. Americans have this funny habit of surprising us.

The main reason why I take Bush more seriously than the markets is that this Texas oil man seems to have been persuaded by the arguments of people like Tom Friedman of the New York Times. Friedman rightly points out that it is all very well simply learning to live with high gas and heating oil prices but Americans must also realise that this just fills the coffers of failed states committed to terrorism. Fight the war on terror but don't finance your opponents at the same time. If any of this is apposite, it is very good news for just about everything except for oil company shares. Serious Money has been positive on oil stocks for as long as he can remember. That positive recommendation is now withdrawn.

Finding reasons to be cheerful is often harder than being a pessimist. The great tech bubble is still fresh in all investors' minds.

But my money is with the private equity boys who have worked out that equities are still a fundamentally cheap asset class.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.