DIY InvestorMagazine
/
March2014
DIY InvestorMagazine
/
March2014
8
9
AREHAPPYDAYS
HEREAGAIN?
Renowned political economist Dr Stephen Barber, says that the economy is
stronger at last but investors need to be strategic in structuring their portfolios
to take full advantage of recovery.
I
t still seems something of a noveltywriting a
commentary such as this with such a seemingly positive
economic backdrop. Long in the anticipation, the light at
the end of the tunnel is finallywith us. TheUK economy,
so anaemic in recovery, is now projected to challenge the
mightyUnited States as the fastest growing in theG7.
But questions remain around the consequences for ending
quantitative easing, the quality of recovery and the risk of
global political instability.
ECONOMIC STRENGTH
The British economywill grow at a rate of 2.8% in 2014
according to the BritishChamber of Commerce and 2.5%
in 2015. That is a big turnaroundwhen compared to the
patchy recovery of recent years. Among other things,
underpinning British economic output is strengthening
manufacturing (according to the recent CIPS survey) and
increasedmortgage lending (according to the Bank of
England). Joblessness has also fallen unexpectedly fast;
such that the new BankGovernor, Mark Carney, has had
to backtrack on his forward guidancewhich had suggested
interest rates could rise once unemployment fell to
7%. Andwhile such jobs levels are the envy of the ‘club
med’ troubled Eurozonemembers, the single currency
is in amuch healthier (if not happier) place than it was
a year ago. Meanwhile, theUnited States has long since
recovered the overall GDP lost during the credit crunch.
Last year, it is believed, US expansion contributed asmuch
as 4.1% to the growth of the rest of theworld. This relative
stability in some of Britain’s principal trading partners
represents some sort of a return to normality - particularly
for those engaged in longer-term portfolio planning.
CAUTION
Conditions have brightened to the extent that the FTSE
100 posted a 14 year closing high at the end of February.
That is a real vote of confidence. But while equitymarkets
have responded positively to the strengthening economy
and the pick-up in corporate activity, investors still need to
exercise caution. TheUK housingmarket looks in danger
of overheating and exports appear well below the strength
conducive to supporting ongoing growth. Furthermore,
themonetary experiment known as quantitative easing,
which saw the Central Banks of Europe, America and Japan,
support the faltering global economy by pumping billions
into asset purchases, is coming to an end. It is true that
markets have been nervous at the prospect of scaling back
intervention butmore than this, the inflationary fear has
been replacedwith a deflationary risk.
Price rises in theUK have fallen to just 2% and the story
is the same in Europe and across the Atlantic. Economists
are divided on the likelihood of falling prices akin to the
experience in Japan over almost 20 years now. Formy
ownmind the odds are stacked against a deflationary
spiral not least because of the prospect ofmoremonetary
stimulus. Nonetheless, investors would bewise to consider
the potential damage such an environment could have on
portfolio planning.
And if ever one needed a reminder of global political risk,
the situation in theUkraine is it. After all, Russia is not only
one of the key emergingmarkets in theworld today but also
an important trading partner formuch of Europe. The knock
on effect has been felt in neighbouring Turkey: a favourite
market formany investors. Sticking our investment heads in
the sand is not really an option. Evenwith a strengthening
home economy, theUK represents nomore than a tenth
of the global economy and some of themost promising
prospects and investment stories continue to be found right
across theworld. It is also a truth that the Londonmarket is
heavily exposed to the four corners of theworld. Balanced
portfolios will continue to be globally diversified, but
investors should take riskmanagement seriously.
RISKANDRETURN
Good investment is always amatter of balancing risk and
return. Compared to the roller coaster that was the credit
crunch, the new environment investors now find themselves
in is positively stable. Indeed, prospects for stable growth
are better than at any time since the crisis. TheUK
has at last dragged itself out of the ‘doldrums’ and the
market appears to offer investors an increasing range of
prospects. And if the Chamber of Commerce is right then
the overall size of the economywill return to pre-credit
crunch levels by the summer.
Pointedly, however, as investors shift their strategies to
profit from the changing backdrop, some of the defensives
which have been themainstay of portfolios for some
time are losing favour as investors seek opportunities
in recovery. As conditions change, investors should be
minded to adjust their strategies to take full advantage of
future prospects.
This article does not constitute advice. If you are in any
doubt you should seek independent financial advice.
REFERENCES:
OnUS economy:
Parts of UK economy doingwell andweaknesses:
BBC projections for UK economy:
