UK: Investment Management Outlook – March 2006

Last Updated: 6 April 2006

World markets

Feeding frenzy

For much of 2005, we drew attention to the fact that, while corporate war chests have been swollen by a combination of soaring profits, companies were reluctant to reinvest in new plant, preferring instead to make share buybacks and acquisitions, and we believed that this would act as a major support to global markets. Since the start of 2006, the pace of takeover activity has undergone a step change, with the prices for target companies reaching impressive levels as bidders fought for control of scarce assets, while being able to avail themselves of cheap credit. We therefore believe that the feeding frenzy will continue, even though history has proved that acquisitions are as likely to destroy as to create value. Investors should enjoy the ride, but be prepared to sell the shares of bidders that put corporate egos ahead of value for money. Leading companies in the energy and mining sectors now feel unable to employ their funds profitably in new investments and are returning huge sums to shareholders. UBS has calculated that the world’s five leading oil companies alone could return up to $250bn to shareholders in the form of share buybacks over the next three years, depending on the oil price, and this cash will undoubtedly be recycled into other equities. We remain bullish for markets.


Safe as houses?

The US economy is losing altitude – the question is how rapidly. Q4 GDP grew by a mere 1.1% (annualised) against expectations of +2.8%, thanks to a steep downturn in both capital investment and consumer demand for durables, especially cars. We suspect that these figures are underestimates, and will be revised up in future months. Indeed, a mild January triggered a strong rebound in both retail sales and housing starts. Personal income growth is slowing, but according to the Commerce Department, this has not held back expenditure, which has so outstripped incomes that the savings ratio has fallen to -0.7%, the eighth consecutive month in negative territory. The scope for continuing to spend in excess of income by using one’s home as a giant ATM has been significantly impaired by a combination of rising mortgage rates, a fall in affordability to a 10-year low and signs that the rise in prices is faltering. The Fed’s new chairman, Ben Bernanke, believes that the housing market will have a soft landing, but in our view, the US remains the weakest link in the global economy, unless a falling oil price throws a lifeline to the consumer.


Open season

The UK consumer has for years been closer in his spending habits to his US counterparts than to those on the Continent, but the recent messages have been mixed. On the one hand, consumer credit in December showed the weakest rise in 5 years, on the other, consumer sentiment is reviving, house prices in December were unseasonably strong and the number of mortgage approvals was the highest since May 2004. Indeed, some commentators predict that house prices may be rising at a 10% rate by mid-year. Thanks to a marked switch in consumer preference from actual shopping to Internet shopping, demand for retail space has plummeted over recent months, and it is clear that, despite the support of low interest rates, investors in property will have to be more discriminating this year. Warehousing for Internet retailers looks more promising than shops on the High Street.

Despite our worries that investors are becoming overconfident, the UK equity market is showing renewed strength, powered by a wave of takeovers. We believe that this is the happy result of three factors that have become more pronounced over the past few months. Firstly, strong pension fund demand for long-term income streams, forced upon them by their actuaries, has driven down longterm bond yields, making equities seem relatively attractive. The latest budget data indicates that the government will need to issue £3bn less debt than the £40bn previously forecast, further aggravating the supply/demand balance. Secondly, strong cash-rich balance sheets and low borrowing costs, driven by the same low bond yields, encourage takeovers. Finally, chauvinism has re-emerged in Europe, where governments are closing their doors to foreign predators such as Mittal, which is bidding for Luxemburg’s ‘national treasure’ Arcelor – ignoring the fact that Arcelor itself has been on the acquisition trail overseas. The French government intends to submit an amendment to the takeover law currently going through parliament authorising companies to launch ‘poison pills’ if subject to, or anticipating, a hostile bid. The UK, by contrast, puts few barriers in the way, which is as good as putting a ‘For Sale’ sign on UK plc. The net result is that the buying power of the corporate raiders has been focused in UK equities. With a bit of luck, we will continue to see further bids at the wrong price.


The lady’s not for turning

How refreshing to find a government that is not prepared to make exaggerated growth projections. In shining contrast to Gordon Brown, Angela Merkel is resisting the siren calls of politicians and trades unions alike to rescind the 3 percentage point rise in VAT scheduled for next year. They claim that the economy is showing a robust recovery and such a swingeing tax increase will be unnecessary to keep the budget deficit below 3% of GDP. Not so, says the Chancellor. GDP growth will be only 1.4% this year – a figure well below market expectations of 1.9%. We believe the market is right, even though retail sales for November and December have been disappointing. The latest ifo and ZEW surveys of business and consumer confidence have been very optimistic. Furthermore, while the government had pencilled in a €4bn loss for the Federal Labour Agency, which distributes unemployment benefits, thanks to tougher unemployment criteria, its 2005 deficit was only €347m. The unions are on the warpath for higher wages, but their power is being blunted by ongoing corporate restructuring. Volkswagen, for example, is seeking to cut 20,000 jobs in Germany. The nation’s largest trades union, Verdi, has embarked on the largest public sector strike in 14 years. At the time of writing, the Chancellor has refused to intervene; let us hope she keeps her nerve.

Elsewhere in the Eurozone, there are signs that the Spanish economy is slowing down – which could explain the renewed interest of Spanish banks and construction groups in overseas acquisitions.

Far East

Is it in the price?

Over the past two years, investors have enjoyed a very profitable ride in the Japanese market, but while the party atmosphere has been buoyed by the arrival of latecoming US generalist funds, early investors have begun to ask whether most of the fun is over and it is time to leave. The latest GDP data, for the three months to December were impressively strong. The economy grew at an annualised 5.5% rate, while personal consumption (+3.2%), capital investment (+7.2%) and housing investment (+7.6%) outpaced net exports (+2.4%), showing that the export boom has finally rippled into the domestic economy. Investors were unimpressed, however, and shares fell. Admittedly, valuations are looking somewhat stretched in PER terms, but we do not believe that this is the only yardstick driving the market. The recovery in asset values has had a far-reaching impact on the banking sector, and hence on the wider economy. MUFG, the world’s biggest bank by assets, reported in February that it has raised its net profit forecast for the year to 31st March 2006 from Y830bn to Y1170bn. Borrowing, especially by home buyers, is precisely what the economy needs to sustain the transition from exports to consumption. Profit taking after the GDP data brought the Topix back to a support level, and the market has since rebounded strongly from a very oversold position. We remain happy to hold.

Elsewhere, the Chinese economy continues to expand. Retail sales are growing by 11% compound in real terms and auto sales in January grew by 70%. Between them, the two Asian giants are likely to ensure that the global economy continues to expand at an above-trend rate this year.

Smith & Williamson Investment Management, a trading name of NCL Investments Limited (Member of the London Stock Exchange) and Smith & Williamson Investment Management Limited. Both companies are authorised and regulated by the Financial Services Authority.

Disclaimer: This document contains information from sources believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to its accuracy or completeness. This is neither an offer nor a solicitation to buy or sell any investment referred to in this document. Smith & Williamson Investment Management documents may contain future statements which are based on our current opinions, expectations and projections. Smith & Williamson Investment Management does not undertake any obligation to update or revise any future statements. Actual results could differ materially from those anticipated. Appropriate advice should be taken before entering into any transactions. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication. Smith & Williamson Investment Management is a trading name of NCL Investments Limited and Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.

© Smith & Williamson Investment Management Limited 2005

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.