| |
Market
returns, in local currencies, for 1 January 2005 to 6 May
2005: |
|
| |
| |
•
UK (FTSE All Share) |
1.5% |
| |
•
USA (S&P 500) |
-3.5% |
| |
•
Europe (FTSE Euro 300) |
4.3% |
| |
•
Japan (Nikkei) |
-2.6% |
| |
•
FTSE Global |
-2.3% |
|
|
| |
Well
we have avoided the dreaded Hung Parliament (the worst outcome
for the Stockmarket). It may be a bit dull, but clearly with
Labour back in, albeit less convincingly, and with the result
being fairly predictable we would expect more of the same
from the markets. Of course we don’t know if, for example,
there will be another war or whether the politicians will
derail the economy. That aside there will be at least three
big economic rather than political trends that will dominate
the next four or five years. |
|
| |
|
|
| |
1.
The economic rise of China and India. In 2004 China
is likely to have already become the fourth largest economy
(measured on actual exchange rates) overtaking the UK. This
is the first time for around 150 years that a developing country
has a larger economy than the UK – this is a huge shift
in influence. Manufacturing jobs will move to China and servicing
jobs will continue to move to India. |
|
| |
2.
The tight oil market. Rising oil prices have remained
a worry for the past two years and economic forecasts are
beginning to be cut accordingly. World oil production is likely
to peak within the next five years with some forecasters actually
predicting that the peak year will be as early as 2006. Even
without this worry about the supply side; China and India
will put pressure on the demand side of the equation. The
world will have to adapt the prospect of high oil prices for
the foreseeable future and this will have a negative impact
on global growth. |
|
| |
3.
Rising world interest rates. We are now at the end
of a long period where interest rates for much of the Eurozone
and America have been below the rate of inflation. The real
cost of borrowing for many companies has been zero. This situation
can not continue for long and America has begun to gradually
raise interest rates. But the European Central Bank (facing
weak conditions in much of the Eurozone) has failed to do
so. Cheap money encourages capital investments in unsustainable
projects and when the bubble bursts many companies will go
bust. The raising of interest rates still has a long way to
go. In the US higher inflation is beginning to result in an
expectation that American interest rates will rise quicker
than previously thought. |
|
| |
|
|
| |
So
the million dollar question: What impact will all this
have on the stockmarkets? |
|
| |
Since
we last wrote in October 2004 the markets have continued to
move in a fairly narrow trading range. The markets having
been strong in January and February have since declined and
very recently picked up again. A combination of high oil prices
and rising interest rates (as outlined above) may push the
world economy into recession. Here in the UK we are already
seeing weakening retail sales and housing market. Meanwhile
the US has trade and budget deficits that China, Japan and
the rest of East Asia may no longer want to fund. Again this
could result in a world recession. |
|
| |
Alternatively,
following a quick reduction in world growth this year, inflationary
pressures may ease, with interest rates consequently peaking
the world economy could begin to grow again. There certainly
will be a downturn but for how long and by how much as ever
remains a matter open to debate. How the new UK government
copes in this environment remains to be seen. We do have an
advantage over the Eurozone as we have control over our own
interest rates. It is becoming very hard for the European
Central Bank to set rates that suit the entire region. |
|
| |
So
what to do? There have been niche areas with strong performance,
Hedge Funds one minute ‘Small Cap’ companies
the next, but we can’t avoid the fact that there are
risks and uncertainties to any chosen investment. Yes, even
if you think you’re safe, there is the risk that something
else would have been better.
|
|
| |
So
in an uncertain world let’s look at some of the certainties
– to borrow from our friends in the Met Office: ‘There
will be weather tomorrow’:
|
|
| |
| |
•
We all need income in retirement |
| |
•
The higher the income the easier it is to reduce Inheritance
Tax |
| |
•
Relying on the State will not be good enough |
| |
•
The more you save (regardless of the investment) the
higher
your income in retirement |
|
|
| |
|
|
| |
Our
view remains that stockmarkets are going to continue to trade
in a narrow range for a considerable time and that equity
returns are likely to be below 10% per annum for the foreseeable
future.
|
|
| |
However,
we remain ‘equity’ people with their impressive
long term track record, but, with instant access deposit rates
continuing to offer 5%, stockmarkets are being hard pushed
to offer the better prospective returns required to justify
the higher risk. Although we are not advocating wholesale
selling of equities; if you do have some spare cash, don’t
be shy to keep it that way! |
|
| |
|
|
