Quarterly Investment Report - Qtr ending December 2005
“Prediction is very difficult, especially about the future”
Niels Bohr (1885-1962)
Foreword
Certainly there is never a time where there aren’t positive and negative factors affecting either the global economy, the UK or individual securities for that matter. The art is balancing these “for and against” factors and deciding which is likely to dominate and thus cause downwards or upwards movements in stocks.
Whether our view on future events proves to be well founded or not, it is probably fair to say that the industry consensus would be that over the next couple of years we are looking at single digit returns from all/any asset class.
Commentary
The MPC has maintained rates at 4.50%.
The number of people in England and Wales unable to pay their debts hit a record high in the third quarter, further evidence that Britons are now paying the price for their borrowing binge of recent years.
The present state of the nations pockets will doubtless begin to be reported from retailers in the run-up to Xmas. We expect spending to be markedly down on last year.
The UK stock market fell markedly at the end of October/beginning of November but has recovered to near its recent highs of late.
Outlook
As we see it, the following are the major positives and negatives affecting individual asset classes/Sterling:
Sterling
Negative: Static UK interest rates.
Positive: US$ will have to fall to correct US trade deficit.
Our view: That the £ will remain broadly static against the other major currencies.
Variable interest
Negative: Static UK interest rates.
Positive: Safe haven relative to other asset classes. Base rate still above inflation.
Our view:
Hold existing deposits.
Add to cash through asset disposals.
Fixed interest
Negative: Rising UK government borrowing. Rising US inflation. Rising US interest rates. Falling US Treasury prices.
Positive: Static UK interest rates.
Our view:
Hold quality stock (BBB credit ratings and above) and junk bonds (CCC ratings.
Buy 2nd line fixed interest securities such as Preference shares.
Buy bonds rated B to BB, but be very selective.
Equities
Negative: High levels of consumer debt. Significant downturn in consumer spending. Rising bankruptcies and repossessions.Significant downturn in consumer spending. Rising bankruptcies and repossessions.
Positive: Bank of England expect growth to accelerate to more than 3% in 2007.
Our view:
Sell cyclical stock.
Hold defensive stocks.
Index-linked
Negative: Relatively low UK inflation rates. Possible peak in UK inflation.
Positive: Feed through of inflation from previous consumer credit boom.
Our view:
Sell index-linked gilts.
Hold 2nd line index-linked securities.
Commodities
Negative: Significant rises have already occurred in commodity prices. China’s consumption of oil and raw materials may reduce. Threat of a world economic downturn.
Positive: Increasing demand of late for raw materials especially in growing economies such as China. Limited refining capacity for oil.
Our view:
Hold commodities.
Gold and Silver
Gold
Negative: Denominated in US dollars.
Positive: World economic uncertainty.
Our view:
Hold Gold.
Silver
Negative: Declining use in photographic film as digital photography gains popularity. Increased mining of lead, copper and gold on the back of higher prices will lead to an increase in silver production as a by-product. Denominated in US Dollars.
Positive: Increasing demand given increasing applications for the metal in areas such as power generation, water purification applications and biocides. Just off an all time low relative to Gold. Last year was the 14th in a row that demand for silver outstripped supply. Silver ETF perhaps to be launched on the US market.
Our view:
Buy Silver, albeit that gaining exposure is difficult.r
Property
Residential
Negative: Negative: Falling prices in many UK areas. Historically high UK property values to earnings ratio. Weakening demand in many parts of the UK. Penal UK Stamp Duties. High levels of consumer debt. Rising repossessions. Fall in the number of mortgage approvals.
Positive: Anticipated influx of EU workers into the UK. Falling UK interest rates. More buoyant private rental sector with First Time Buyers being either unable to get onto property ladder or awaiting a fall in prices at bottom end of market. Boost to housing market expected with advent of new pensions legislation in April 2006.
Our view:
Sell residential property, possibly go back into the market in early 2006.
Commercial
Negative: Penal UK Stamp Duties. Rising Gilt yields. Weakening tenant demand in certain areas/sectors (retail and manufacturing). Analysts predict little capital growth in the immediate turn. Many investors now committing funds to this asset class. Worsening economic background.
Positive: Static UK interest rates. Expected UK GDP growth in 2007 in the region of 3%. Stronger tenant demand in certain areas/sectors (offices).
Our view:
Sell commercial property.
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