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Quarterly Investment Report - Qtr ending March 2007


“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.

 

Commentary

The MPC raised rates by a quarter of one percent to 5.25% on 8th February against a background of UK inflation rising to 3.0%.

 

The Bank has a target for consumer price inflation at 2.0% and is required to write an explanatory letter to the Chancellor of the Exchequer should it deviate by more than one percentage point from that level. We expect rates to rise to 5.5% in the near future.

 

Whilst still not at the levels seen in the early 90s, household unsecured debt/mortgage problems continue to escalate.

 

Outlook

As we see it, the following are the major positives and negatives affecting individual asset classes/Sterling:

 

Sterling

Negative: Rising UK inflation.

Positive: Rising UK interest rates. US$ will have to fall further to correct US trade deficit.

Our view: That the £ will strengthen against the US$ and remain broadly static against other major currencies.

 

Variable interest

Negative: Rising UK inflation.

Positive: Rising UK interest rates. 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 UK inflation. Rising UK  interest rates. Rising US inflation. Falling US Treasury prices.

Positive: UK rate rises may hold at 5% for some time.

Our view:  Reduce fixed interest holdings.

 

Equities

Negative: High levels of consumer debt. Rising bankruptcies and repossessions. Rising raw material costs.

Positive: Expected UK GDP growth in 2007 in the region of 3%.

Our view: Sell cyclical stock. Hold defensive stocks.

 

Index-linked

Negative: Relatively low UK inflation rates.

Positive: Rising inflation.

Our view: Hold index-linked gilts. Buy 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 has now been launched on the US market.

Our view: Buy Silver, albeit that gaining exposure is difficult.

 

Property

Residential

Negative: Ratio of UK property values to earnings is substantially above its historic trend. Penal UK Stamp Duties. High levels of consumer debt. Rising repossessions and insolvencies. Rising UK interest rates.

Positive: Anticipated influx of EU workers into the UK. 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.

Our view: Sell residential property.

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. Rising UK interest rates.

Positive: Expected UK GDP growth in 2007 in the region of 3%. Stronger tenant demand in certain areas/sectors (offices).

Our view: Sell commercial property.

 
Important:
This publication does not provide individual tailored investment advice and is for general guidance only. We recommend that individuals seek independent professional advice from a qualified financial adviser. This publication represents our understanding of law and Inland Revenue practice as at the date of publication. We cannot assume responsibility for any errors or omissions it might contain. Levels, bases and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of land and buildings is a matter of a valuer’s opinion rather than fact. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not necessarily a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years you may get back less than you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.
Your Home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Services Authority does not regulate all the activities undertaken by the company.


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