Mott says that the UK economy is now at a long-term inflection point and that we can no longer rely on financial services and consumption to drive the economy forward.
He says: “We need several years of anaemic growth so that our savings rate can be restored and so that the economy can rebuild its productive manufacturing base. This can only be achieved gradually over a number of years. In our view, there is a good chance that the measures already taken will deliver this readjustment.”
Mott says the 20 per cent chance of Armageddon is one of three scenarios, one of which he says is a 50 per cent chance that ‘green shoots’ of recovery appear in the likes of cyclicals and start to rally.
“We believe that there is a good possibility that the policies being applied to reviving the economy will start to produce some ‘green shoots’. It may only be a slowing in the rate of decline, but the stock market is likely to respond positively to some signs that there are early, though small, signs of a pickup. If this is the case, then selective economically-sensitive stocks, such as cyclicals, are offering a ‘once in a generation’ buying opportunity.”
Mott points to concerns over the Government over-doing any potential stimulus to the market, claiming that there is now a 30 per cent chance we could face an inflation problem thanks to quantitative easing.
He says: “In our view, the authorities should delay quantitative easing -effectively increasing the money supply – until it is certain that recent aggressive initiatives have not worked.
“My view is that history is littered with examples of authorities tightening – raising interest rates – at too late a stage of economic recovery. We should remember, also, that this need for interest rate rises could coincide with a Labour Government trying to get itself re-elected in spring 2010. Interest rate rises, though needed in the long-term, may fall foul of political short-term expediency.”