View more on these topics

Walking the tightrope

After the terrible events of September 11, I felt the market had over-reacted to the economic consequences. I believed that we needed to increase the aggressiveness of our portfolios as the policy response by the authorities worldwide made a recovery from a “false economic low” much more likely.

This was a tactical move, not a long-term strategic shift. During December, our income portfolios were repositioned some way back to our original defensive stance.

It is possible that when the first signs of recovery do appear, the stockmarket may rally again – if this occurs,it will be the time to go fully defensive.

However, we believe it is now increasingly likely that the market is already discounting the extent of the economic revival and that from now on the London market will not make much progress for some time. Despite this, it will still be possible to deliver attractive returns.

The current recession in the US is different to most post-war recessions. In early 2000 the US saw a huge trade/private sector deficit and a frightening stockmarket bubble. Sustained economic growth depended on increasing debt levels, only possible by maintaining the fragile asset bubble.

Once the bubble burst, falling asset prices combined with falling corporate profitability triggered a sharp inventory adjustment and massive cuts in capital investment.

There is significant risk here. As companies try to fill holes in their balance sheets, they may shed workers – putting the pressure on the debt-ridden consumer who is currently the only engine for economic growth.

All post-war recessions were caused by governments imposing higher rates to cure inflationary overheating cuts into consumer spending. This recession was created by the investment boom on the back of an asset bubble.

Massive global imbalances remain. A quick US recovery could be dangerous, exacerbating these imbalances which need to be corrected over time. An anaemic recovery is required to maintain long-term global economic health.

The Fed must now walk the tightrope between the post-bubble danger of debt deflation, as in Japan, and a V-shaped recovery that would postpone and increase the economic pain.

There are major imbalances in UK. Overall GDP growth has matched long-term trends, at the expense of allowing the consumer to spend, spend, spend – so counter-balancing a manufacturing recession.

The Bank of England&#39s solution is to restrain the consumer only when productive economy is boosted by resumed global growth. Like the Fed, the Bank of England is walking the tightrope – in danger of allowing contagion from the corporate sector to the consumer to cause recession or a collapse in sterling on the back of rising interest rates.

Even a favourable outcome will only deliver approximately 6 per cent earnings per share growth (2 per cent inflation, 2 per cent long-term GDP growth, 2 per cent long-term productivity growth). It is time for investment realism after the late-1990s&#39 experience.

Opportunities do remain in the UK market – with the food industry as a good example. Food manufacturers have historically performed poorly.As their customer base has been consolidated, the power has been exclusively with the food retailers.

However, the industry has now reached maturity and in order to eke out more returns, food retailers may employ high-low policies, whereby basic products go out cheaply and increased shelf space will be allocated to the higher-value-added and convenience products.

Food manufacturers such as Dairy Crest and Northern Foods are set to participate in this theme but these companies are currently undervalued.

Another factor to take into account is public spending – an area which has been neglected over the past 25 years in both the UK and overseas. In the UK there is set to be a massive crank-up in public spending. This will have a positive knock-on effect on several industries, including construction and building materials. The security and strength of the earnings are set to be much greater than their ratings would indicate relative to the market.

In conclusion, we believe the future economic and stockmarket landscape will be dull – but not dire. Consumer debt levels will dampen demand, while the manufacturing recovery will be feeble. This will inject a dose of realism into the market.

Investors will see that double-digit growth is an unrealistic expectation in a world where nominal GDP rises by just 5 or 6 per cent a year. The market will move side-ways until ratings become more realistic. In this environment, many predictable, defensive, high-yield, low-growth stocks will appear undervalued against false expectations of growth.

We see opportunities in this anomalous pricing which we believe will allow us to deliver attractive returns.


Corporate responsibility

Corporate affairs is the preserve of regulated – some might say over-regulated – industries. No self-respecting energy, transport or telecommunications giant will feel competent to operate without a corporate affairs department – and now it seems that is becoming the norm for the financial services sector.So, what is corporate aff-airs? It is fair to say […]

A consumer&#39s view

The repercussions of the ombudsman&#39s decisions on dual pricing of mortgages rumble on. There is concern that his decisions on individual complaints are having far-reaching effects that are not necessarily in consumers&#39 long-term best interests. The upshot could be less choice for homebuyers.The complaints about dual pricing against Halifax, Nationwide and Abbey National were all […]

ZAN chief jubilant at CP121

Zurich Advice Network distribution chief executive Keith Baldwin has crowed at a salesforce conference about depolarisation and a crisis of confidence among IFAs.In the company&#39s internal newsletter covering its January conference, Baldwin says: “The key point is the endless debate about independence versus tied is at long last redundant. The status of an adviser is […]

ScotLife pension push uses football analogy

Scottish Life is setting up a marketing campaign that asks clients to see themselves as the chairman of their favourite football team as a way of understanding how they should deal with their pension.As chairman, clients appoint an IFA as their “manager” and are asked to pass on responsibility for recommending decisions, substitutions and transfers […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm