This week’s headlines:
- With the UK officially out of recession there has been a rebound in consumer confidence with people far more optimistic about their financial prospects.
- The housing market surged in January raising the possibility of property attaining double digit gains.
- US GDP figures were pleasantly better than expected as the economy surged ahead in the last quarter of 2009 thanks to strong exports and consumer spending.
- The markets will be watching for moves by the Bank of England to withdraw its policy of quantitative easing following comments made by an MPC member.
- The eurozone bond markets were thrown into disarray last week as investor concerns about Greece grew and the possibility of it being bailed-out by the EU.
- Hugh Young of Aberdeen Investment Management and Neil Woodford of Invesco give their respective views on the outlook for the Far East and the UK.
News that the UK economy just about managed to grow in the last quarter of 2009 means that Britain is now technically out of recession. Whilst official figures from the Office of National Statistics (ONS) showed that GDP grew at 0.1%, many economists believe this figure will be revised upwards as further data is obtained by the ONS. An increase in industrial production and services sector output have helped the UK to finally emerge from one of the longest post-war recessions. The news coincided with a survey by the British Retail Consortium and Nielsen which found that more people were feeling more positive about their job prospects and personal finances, helping to drive up confidence for the third consecutive quarter, according to The Daily Telegraph. The feel good factor continues to be felt in the housing market where, according to the Nationwide house price index, prices surged by 1.2% during January – with activity buoyed by buyers rushing to beat the end of the stamp duty holiday. This brings the year-on-year rise to 8.6% and if last month’s rise is repeated in February could see a return to double-digit gains. But whilst good news, not every region is benefitting, with house price falls in Wales and the North West.
There is a similar positive feeling too in the boardrooms of British businesses, according to accountants PwC, which carried out a poll of chief executives worldwide. Some 63% of CEOs questioned said they were confident that recovery would happen this year – making British business leaders more upbeat than their European counterparts. This contrasts sharply with Germany’s CEOs where only 27% expect business to improve. Indeed, according to official statistics, the German economy stagnated in the final quarter of 2009 after two positive quarters and consumer confidence has fallen for four straight months. And whilst the UK is back on track, recovery is patchy, with the construction industry’s body Construction Skills saying it will not emerge from recession until 2011 – more than 375,000 workers have lost their jobs during the downturn. But on balance, leading economist Roger Bootle remains positive, saying “There is still everything to play for. The UK bounced back after both the 1980s and 1990s recessions . . . my money is on the UK staging a third national resurgence”.
And resurgence is exactly what the US economy experienced in the final quarter of last year. Much to everyone’s surprise, the world’s largest economy grew at its fastest rate since 2003 as investment by business picked up and consumer spending continued to grow. The economy expanded at an annualised rate of 5.7%, according to data from the US Commerce Department, raising hopes that employment growth could soon follow. The figures also showed that there was evidence of an upturn in exports – up 18.1% over the quarter – and consumer spending was ahead by a solid 2%. The numbers helped assuage fears from news earlier in the week that US home sales had tumbled 16.7% last month following a rise in November. But an economist at Wells Fargo Securities commented “With the extension and expansion of the [first-time buyer] tax credit we would expect sales to show solid gains in coming months”. Whilst few expect the US economy to sustain the rapid pace of expansion the view is, according to The Financial Times, that growth could settle back at around 3% for this quarter.
Goodbye to QE?
Sterling climbed against the dollar and euro early in the week following comments by Andrew Sentance, a member of the Bank of England’s Monetary Policy Committee, which heightened expectations that quantitative easing (QE) could be called to a halt at the MPC’s meeting this week. The BoE introduced its policy to pump £200bn of emergency money into the economy last March, in response to the financial crisis. Mr. Sentance alluded to the “stickiness” of inflation – currently at 2.9% and above the Bank’s 2% target – and questioned whether monetary policy needs to be so supportive. However, some economists are arguing that the continued underlying weakness of the economy justified maintaining QE and that it is much too early to contemplate any near-term interest rate increases. If QE were withdrawn it would mean that the BoE would no longer be a buyer of UK government debt in the form of gilts, which has helped support demand.
The Delights of Davos
It was that time of year again for the world’s business and political elite as they attended the annual World Economic Forum at Davos. Unsurprisingly, bankers were in the firing line from the likes of George Soros, with David Cameron warning of Obama-type rules for the UK if the banks didn’t toe the line. Self-flagellation for the industry came from HSBC’s chairman, who called for pay constraint, whilst Unilever’s CEO Paul Polman made an impassioned plea to fellow business leaders to lead from the front on sustainability and climate change. But leading the charge was George Papandreou, Greece’s Prime Minister, who took the opportunity during his forum speech to lambast speculators who he accused, according to The Times, of targeting the country as a “weak link” in the euro, adding “This is an attack on the eurozone by certain other interests, political or financial”.
Mr. Papandreou’s comments followed a tumultuous week for the country’s government bonds as prices plunged on financial markets. The country is hamstrung by its need to borrow heavily to finance extravagant government spending in a recession that has cut its revenues. During the week, investors’ mood went from enthusiasm to deep concern. On Tuesday, investors had flocked to buy the Greek government’s first bond issue of the year as international alarm over its debt crisis seemingly abated – orders were four-times more than expected. However, nervousness increased as the week progressed with rumours circulating that a bail-out by the EU was being planned – denied by both Greece and the EU. However, yields on Greek bonds soared to 7.25% at one point and the prices of the bonds issued earlier in the week promptly fell around 10% as investors bailed out. The problems overflowed to other parts of the eurozone bond markets, with the focus on weak economies such as Portugal and Spain.
“It has been a very long week for the eurozone and Greece. As a result of the yield increase, Greece will have to pay more interest on the next bond” commented HSBC’s head of fixed-income research. Events in the bond markets, together with ongoing worries about Chinese monetary tightening, weighed on global equity markets last week, causing investors to move to the sidelines. By the end of the week most major global equity markets had retreated despite the better economic news and the fact that, according to The Financial Times, last quarter corporate earnings were mostly in line with, or ahead of analysts’ expectations.
Land of Opportunity
Investors looking for a home for their capital have plenty of choices and high up the list for many are funds investing in Asia and other emerging markets. As China and other regional economies move into economic ascendency, their attractiveness for investors has understandably increased. Aberdeen’s Far East fund manager, Hugh Young believes Asia will lead global growth in 2010, pulling other emerging markets along with it. He says while developed countries increasingly suffer the effects of fiscal indebtedness, Asia will continue to decouple as domestic demand grows and reliance on exports is reduced. However, if the west experiences a relapse, Asia will not escape unscathed he cautions as regional economies still depend on demand from the west for manufactured exports as well as inward fixed and portfolio investment. “We believe that Asian economies will continue to make good progress in 2010 as domestic demand rather than a reliance on exports supports their growth and position as the leaders of global growth. However, the recent corporate earnings growth of 2009, buoyed by one-off factors such as cost-cutting and inventory restocking, will be hard to repeat unless a more fundamental improvement in profitability occurs. At the same time, while Asian economies continue to decouple, they are not immune to the effects of developed economies’ fiscal indebtedness and the subsequent pressure on governments to withdraw stimulus support, increasing the risk of an economic relapse.”
Mr. Young continues to prefer the quality of Indian companies over Chinese companies due to their healthy balance sheets and good management. “Also I much prefer to own companies listed in Hong Kong, it feels safer and they know how to treat their shareholders. I also like Singapore-based companies due to their prudent management and regional reach. I remain committed to the domestic growth story of these economies and continue to overweight financials excluding though, Chinese and Australian banks. While in absolute terms valuations are no longer cheap, we think the region deserves a higher premium to reflect its fundamental strengths including its low levels of personal, corporate and government debt.”
UK Offers Value
Whilst investing in emerging economies obviously makes good sense as part of a diversified portfolio, many investors are potentially overlooking better value closer to home, according to The Times. The paper said that investors are confusing the UK stock market with the UK economy whereas in fact they are totally different. Almost 70% of the earnings of the UK’s top 100 companies come from overseas, so the fortunes of these businesses are not very closely tied to the British economy at all. Some of the UK’s top investment managers believe there are some excellent opportunities in the unloved UK stock market, including Neil Woodford of Invesco Perpetual.
“I think the UK stock market offers very rich pickings and looks like a place to go for attractive yields. There are a number of large stocks such as Vodafone, BAT and National Grid that now look really good value as well as offering attractive yields. We have to differentiate between the tough economic message and the investment opportunity. The stock market is not the economy and many businesses that I am invested in really do not interact at all with the UK economy. Despite the economic headwinds, I believe that there is a relatively small group of companies that will be able to deliver attractive returns” commented Mr. Woodford.