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Market
returns, in local currencies, for the year to 5 October 2004
were: |
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•
UK |
5.6% |
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•
USA |
-1.6% |
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•
Continental Europe |
3.9% |
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•
Japan |
9.3% |
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After
a very strong 2003, Stock Markets have traded in a narrow
range in 2004 and are showing few signs of breaking out. |
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Let’s
recap; in October 2003 we looked at four key issues for markets
which could as always be viewed positively or negatively.
We updated sentiment on these points in February 2004. Our
current thoughts are now added. We apologise for being repetitive
but this is the result of markets having moved little and
hopes and fears remaining the same. |
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War
in Iraq / Oil |
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<Oct 2003> The war in Iraq
was quickly won but the casualties continue to rise and peace
in the Middle East seems little closer. The oil price remains
high. |
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<Feb
2004> No change here, if anything the peace
keeping in the Middle East is becoming more fraught and dangerous.
The legality of the original decision to declare war seems
even more tenuous. |
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<Now>
Effects of terrorism continue to worry investors, politicians
and the general public. The resulting disrupted oil supply
and high oil prices are occupying most analysts’ thoughts.
Although supply should eventually increase and demand fall
this equalisation will take some time. China’s rapid
increase in GDP is greatly increasing the current demand for
oil. Initially the City was hoping that this time the high
oil price would not feed through into higher inflation and
would be far less of a threat than in the 1970s. The optimistic
reasoning was that employees would be unable to claim higher
wages and their increased energy bills would mean that instead
they could spend less elsewhere - hence high oil prices would
actually be deflationary with less need to increase interest
rates! We think that normal service is now being resumed and
we are beginning to see the inflationary pressures of high
oil prices. Even the optimists expect high oil prices to result
in slower world economic growth and we agree that oil prices
are already putting a gentle brake on the world economy, which
could be more dramatic in the longer term. |
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US
trade and budget deficits |
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<Oct
2003> There are growing US trade and budget
deficits which could either drag Europe and Japan out of recession
or derail the engine of world growth. |
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<Feb
2004> It looks like the optimists are winning
this one. Global trade, on the back of a phenomenal boom in
China, has taken off. Some forecasters are estimating that
trade flows may be over 30% higher in 2004! UK GDP figures
for 2003 have just been released at 2.3% - this is comfortably
within the Government’s forecast range of 2% to 2.5%
but above most city forecasters’ expectations. Optimists
now point to global economic recovery gaining momentum in
2004 and analysts are upgrading their profit forecasts. |
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<Now>
OECD growth forecasts are once again being cut. Sentiment
seems to be back where we started. It’s very easy to
feel swamped by global problems, but it is not all bad news
and even Japan has recovered some of its poise. Our view remains
that stockmarkets are going to continue to trade in a narrow
range for a considerable time. |
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The
US 2004 presidential election
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<Oct
2003> The US 2004 presidential election is
traditionally positive but it could lead to more uncertainty
if the recent electoral outcome of the Californian Governor
Arnold Schwarzenegger is anything to go by!
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<Feb 2004> No changes here. |
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<Now> The outcome is still not
settled. |
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Interest
rates / Inflation / Property |
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<Oct
2003> The next interest rate move is quite
likely to be in an upward direction - a negative influence
on fixed interest stock values but a positive influence on
annuity rates. As ever a debatable influence on equity values.
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<Feb 2004> Although interest
rates have begun to rise in the UK and Australia, the Federal
Reserve in America has stated that ‘monetary policy
will stay accommodative for the foreseeable future’.
Unusually for a period of global growth we are also in a period
of low inflation. With interest rates still at low levels,
cash returns low and bond yields unlikely to fall further,
investors have either been tempted back into equities or have
at least stopped their switching into bonds. The worries over
high consumer debt are being put to one side for the moment
as neither unemployment nor interest rates are expected to
rise sharply in 2004. |
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<Now> Interest rates have
begun to rise in America where they now stand at 1.75%. In
UK Base Rate is 4.75%. This is not dramatic but global growth
forecasts are being cut and inflationary expectations are
again creeping up but from a very low level. UK house prices
have increased substantially but with higher interest rates
further increases to house prices are unlikely. There is some
talk of a sharp fall in house prices with all the negative
wealth effects that may bring, but I expect to see a period
of gradual (and probably modest) decrease – not a crash
– before further gradual increases. The reasoning here
is that there should be a correction after recent over-excitement,
but remember there is an estimated deficit of 30,000 residential
units per annum; a classic case of supply and demand. General
sentiment now expects the next UK interest rate move to be
upwards again, but I can’t see rates going beyond 5.5%.
This should be enough to keep a tight control on inflation
and not so much that UK consumer and government borrowing
becomes unsustainable. |
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Summary
Outlook |
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<Oct
2003> After the recent bounce the markets
are bound to look less attractive. However the all important
factor of investor sentiment does seem to be changing - the
bears are becoming quieter and there are fewer of them.’
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<Feb
2004> Most valuation methods now show that
equities are still more expensive than the historical average;
in particular dividend yields are very low. We feel that it
is unlikely that markets will continue to roar away from here.
There are many uncertainties which could at any time be brought
to the forefront, such as terrorism, US protectionism, the
weak US dollar and the large and growing US current account
deficit. Consumer demand and with it house prices may drop
away, especially if interest rates are still rising. |
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<Now>
Nothing has changed our views here. Our previous outlook if
anything seems more likely, with oil worries being added to
the mix and cost of increasing regulation dampening the economy
by an estimated £30 billion per annum. Although we want
to be optimistic it becomes harder and harder to do so, however,
with a continued tight grip on inflation we appear to have
shaken off the boom/bust of the eighties and early nineties.
The last recession was 1991/92 and we think we are some way
off the next. |
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It
is our view that equity returns are likely to be below 10%
per annum for the foreseeable future and that that stockmarkets
are going to continue to trade in a narrow range for a considerable
time. |
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Cash
Deposits |
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<Now>
With instant access deposit rates having increased
rapidly to 5% and with no corresponding inflation increase,
stockmarkets need to offer better prospective returns to justify
the higher risk. Although we are not advocating wholesale
selling of equities; if you have some spare cash, you should
consider keeping it that way! |
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Pensions |
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<Now>
It is all happening in the pension world - even
the tabloids are talking about them! Amongst all the comment,
please don’t forget, the reason to invest in a Pension
is to provide an income in retirement. |
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Our
advice is not to get wrapped up in the detail. We have two
pages on the web site one entitled ‘Pensions
– Why Have One?’, the other ‘Pensions
– Do Something’. These have been on
the web site for sometime and neither is affected by this
recent flurry of comment. |
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So
please pause for a moment to consider your own retirement
income. Remember the first question we ask when people approach
us for Inheritance Tax advice is: What income do you expect
in retirement? So if it helps concentrate the mind, look at
pensions as an Inheritance Tax measure. |
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