The State of Investment Markets

Simon's View

Almost two years after the collapse of Lehman Brothers is a good time to take stock of where we are economically. Gross Domestic Product (GDP) fell some 4.75% in 2009 and we spent most of last year in recession. At last, however, it was announced that in the last quarter of the year we moved out of recession by the smallest measurable amount of 0.1%, although the official GDP growth figure was 0.3%. Better news in the second quarter showed growth up to 1.1%. We await third quarter figures with interest although it will be too early to tell whether the policies of the new Coalition have helped or hindered progress.

I would like to be positive, and there are many things to be positive about.  But I cannot help thinking that many people are saying to themselves; “Is that it, well that wasn’t so bad, was it”? However, I think it will be a long haul before things in general improve, just due to the amount of indebtedness of the population and the country. We know that there is clearly going to be an impact on public services in future, this will create unemployment in the public sector, which we are already starting to see.  This may have a further detrimental effect on our house prices.  I recently gave a seminar to which a public sector CEO attended. He had been told to expect job losses of 1 in every 6 employees.

Investments had a good period between March 2009 and March 2010.  We have since then seen a great deal of volatility, due to the Greek crisis, BP etc. This has also had a detrimental effect on sterling and particularly the Euro. Fixed interest investments had a buoyant six months or so until September 2009.  Commercial property reached rock bottom.  Residential property also seemed to bottom out in March 2009 and may have recovered modestly since then. 

So what about the future?

Much of the increase in stock markets last year was down to financial and mining stocks, which  were over sold in the crisis.  This means that good investment managers should still be able to make money, as many firms are still good value. It should be noted however, that the indices may not increase much over the next few months, and there is plenty of volatility around at the moment. However, with the All share yielding over 3%, equities seem an attractive place to be for both the medium and long term.

Having reached rock bottom, investors realised that commercial property funds suddenly offered an excellent income yield.  They must now present a reasonable investment option going forward, unless we move into a full-blown depression, which I now think is unlikely.  Fixed interest securities remain a good source of income, but the opportunities for real growth are now in the past, but they will always form part of any portfolio looking for income, or used for diversity. 

The Nationwide having done its best to convince us that the housing market was on the rise during 2009 has now revised its opinion and now sees supply exceeding demand. This allied to higher unemployment may well see house prices drop. July’s 0.5% drop was the first since February.

The Bank of England seems to be split at present. Inflation has risen more than expected, and some members of the Monetary Committee that sets interest rates are concerned about this. However it seems that the majority feels that this will be easy to control and would not want to see interest rates rise and threaten a fragile recovery. Also manufacturing is recovering thanks to a falling pound and rising interest rates would also risk the recovery in this sector. All in all I see interest rates staying very low for some time to come making it difficult for savers and those living off income from deposit accounts to see an attractive return. Again this makes the dividend return available from equities look enticing.

All in all we are inexorably dragging ourselves out of recession but there is still much pain to come, I believe.  Provided that unemployment does not reach huge levels, I would expect steady but not exciting returns from our portfolios this year. However, the new Government is doing its best to warn us that we should expect a period of austerity. The markets will expect them to make inroads into government debt in both the short and long term. I feel that strong and positive action will be good for the markets, and many experts believe that the next decade will be good for stockmarkets, even if the era of “right to buy” and “wrong to rent” could be over, for those in the residential property market.

We advise on all of the above areas, and many more, so feel free to contact me, Simon Ludden by telephone or email if any of the above matters is of interest to you.