Where to invest in these volatile times?


Another tumultuous week for developed equity markets is coming to a close. There aren’t many weeks, even in the world’s fifth most developed economy, which start with pictures of the first run on a UK bank for 140 years, slip seamlessly past an aggressive US base rate cut and end with the governor of one of the world’s most powerful central banks on the parliamentary rack answering questions straight out of Watergate (“who knew what and when”?).

The Bank of England’s “Special One” looks increasingly ordinary and despite a robust defence of his actions in parliament it remains to be seen whether he might, in due course, do “a Nixon” or, in a more contemporary setting, “a Mourinho”!
The purpose of this note is to reassure equity investors that the UK stockmarket remains attractive, despite all the background noise and the increasingly obvious fact that Northern Rock, like an exhausted England rugby player, hasn’t the energy left to hurl a television set out of a Trianon hotel room window!

UK consumer spending set to slide
Perhaps oddly, one of the central foundation stones for our positive stance on the UK equity market is that the UK economy looks increasingly wobbly. For now, household spending appears to be holding up nicely, however, it remains to be seen how long the ebullient consumer will continue to do the retail equivalent of riding a large motorbike aggressively up and down hotel corridors. The UK’s household liability to income ratio has risen to more than 150%, higher even than that of the US (135%) while the servicing of that debt has risen to more than 15% of disposable income (from below 10% less than six years ago). In the meantime the residential property market appears just about secure, although furtive whispers are becoming more audible as the price to wage ratio increases to in excess of 140% (again considerably higher than in the US where the ratio currently stands at 120%) and where part of the almost inevitable fall-out from the Northern Rock crisis is likely to be a tightening of lending criteria.

Consumer spending accounts for around two thirds of GDP here in the UK. But the combination of higher taxation, higher interest rates, a residential property market which shows signs of rolling over and a highly volatile equity market which appears to have got stuck on its seemingly inexorable march higher, does not make for a particularly propitious outlook. Real household disposable income growth has been in steady decline since the peaks (in excess of 6%) of Q3 1999 and is now at zero. Furthermore, the savings ratio has slipped to a decade low at just 2%. (full article )

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