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UK is in the eye of the financial storm, says Rathbones

The UK is set to suffer the most in the financial crisis with more problems and consolidation in the banking sector set to follow in early 2009, warns Rathbones chief investment officer Julian Chillingworth.

According to Chillingworth, who also manages Rathbones’ income and growth fund, the UK housing market will fall at least another 10 per cent and the economy will continue to slow for the first half of 2009.

Speaking at a Rathbone Unit Trust Management roundtable today he said: “Although Christmas won’t be as disastrous as the pundits suggest, into the New Year people are going to be slowing in terms of consumer expenditure quite rapidly.”

Chillingworth estimated that UK economic growth will be -1.5 – -2 per cent in 2009 with unemployment breaching 2m by Christmas. He also believed sterling will be very weak versus the dollar and euro and will remain so and expected interest rates to fall below 2 per cent.

He said: “The government next year has to raise 140bn in new government bonds to make up for lost taxes and to fund the money they’re putting into the economy. We’ll have to see whether further fiscal stimulus will be needed in the second half of next year”

Deflation remains a short-term concern according to Chillingworth but in the medium-term inflationary pressures are likely to resume. He said: “As the economy begins to recover, commodities will pick up and VAT will go back on which becomes inflationary rather than deflationary.”

Chillingworth valued the UK market at a price to earnings ratio of 8 with a dividend yield of 5, taking into account consensus earnings and a 20 per cent cut in dividend forecasts but said the market was yet to hit its bottom. He said: “I don’t think one can be hugely optimistic in the short-term but there are undoubtedly areas of reasonable optimism when we come to the end of 2009.

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