UK: Investment Outlook - April 2008

Last Updated: 19 May 2008
Article by Paul Garwood

World Markets

Pulling Out All The Stops

The turmoil in credit markets reached a crescendo in March, with the Fed-orchestrated rescue of Bear Stearns in the USA and shocking losses at UBS in Switzerland. Investor sentiment, however, had become so depressed, and cash balances so high that even a modest improvement in mood was sufficient to trigger a powerful short-term rally. Whether it can be sustained through the summer doldrums is open to question, given the clear signs of global economic slowdown, and IMF estimates of losses and write-downs from the credit crisis totalling $945bn. Investors can take comfort from the fact that these losses are spread across the world, rather than concentrated in a single country, as was the case in the Japanese crisis of the early 1990s. The leading central banks are also coordinating their approach to the crisis. Furthermore, private equity investors are now prepared to help refinance troubled US mortgage companies and to buy packages of distressed debt from financial institutions. On the other hand, analysts remain well behind the curve in their earnings forecasts, and we expect significant downgrades to 2008/09 forecasts in the months ahead, which have not been fully factored in by investors. If the current crisis takes longer to resolve, we may expect a few years of sub-trend economic growth ahead, and this would impact both earnings and investors' perception of what constitutes reasonable valuations. In addition, the need to recapitalise the global financial sector will act to suck liquidity from investors' portfolios, in marked contrast to 2005 to 2007, when cheap financing allowed companies to retire hundreds of billions of dollars of equity. We expect markets to remain volatile but rangebound, and with significant sector rotation.


How Deep A Recession?

Despite the emergency cut in US interest rates and the massive infusion of liquidity into the global financial system by the leading central banks, against the security of increasingly dubious collateral, the global credit crisis claimed a major victim in the US investment banking sector. Mortgage credit remains scarce and expensive and the regulator has reduced the surplus capital requirements of the two leading mortgage finance companies, Fannie Mae and Freddie Mac, allowing them to take on potentially another $200bn of mortgages. It will take time for this liquidity to filter through to higher demand and a more stable housing market. While housing starts and permits are now running at rates below completions, the level of sales remains weak, and the overhang of unoccupied homes is at record levels. The credit crisis is beginning to hit sectors beyond the housing market, including the infrastructure spending of the municipalities and townships.

The most worrying aspect of the recent economic data is the weakness of the employment component. The March non-farm payroll numbers showed an 80,000 fall, with a 67,000 downward revision to January and February data. The unemployment rate rose from 4.8% to 5.1%. Consumption is already under pressure from rising inflation; wholesale gasoline prices are 25% higher than in October. Not surprisingly, car sales in February fell by 10.2% yoy. If further evidence were needed that both rich and poor Americans are feeling the pinch, we need look no further than the falling revenues at top retailers such as Saks and Macy's and at the casinos in Las Vegas and Nevada. This in turn will lead to a slowdown in construction of hotels and leisure amenities, a strong driver of construction growth over the past two years.

While domestic demand is weak, exports are benefiting from the fall in the dollar, and this will cushion the economic downturn. We see further downside ahead in US equities, but despite dollar weakness, the returns to UK investors have exceeded those from other leading markets this year. Furthermore, as the US economy is the first to slow, it should be the first to recover... and perhaps the market with it.


Rose-Tinted Eyebrows

Signs of slowdown abound. QI construction activity was the lowest since 1996. Sentiment in the services sector fell to a 15 month low, and the KPMG/REC jobs survey showed a decline in permanent placements for the first time since May 2003, and a big shift to temporary and contract employment, suggesting firms are moving to a more flexible workforce.

The survey also shows a marked slowdown in wage demands, and as this coincides with rising food and energy prices, real household income will come under increasing pressure, and consumption will remain weak. House prices fell by 2.5% in March, and derivative contracts suggest prices could fall by 2% per annum for five years; stocks of unsold homes have shown the steepest rise since 1989, while mortgage transactions fell by 33% in February. By the same token, government tax revenue from employment, VAT and stamp duty on housing transactions will also be weak. While manufacturing output beat expectations, order books have contracted for three straight months and costs are under severe pressure.

The Budget measures were widely trailed, and the surprises were in the fine print. The Chancellor's numbers are however predicated on an overoptimistic view of global and UK economic growth. The Treasury forecasts a short, shallow global slowdown with a return to trend of 4.5% per annum by 2009. CEBR expects only 3.1% in both 2008 and 2009. While the Treasury has cut its UK growth forecast by 0.75% to 1.75-2.25% for this year and a recovery to 2.25-2.75% for 2009, CEBR is expecting 1.5% and 1.7% respectively. Even on the Chancellor's forecasts, borrowings will rise by £7bn in 2008/09 and a further £12bn over the following three years, and he will probably fail to keep debt/GDP below 40% in 2009/10. Overall, it will be a long hard grind for the economy this year and next, despite the latest cut in the base rate. Equity risks remain on the downside.


Profits Hit By Euro

The Eurozone seems to be splitting into two groups - Germany, with strong manufacturing order books and rising employment, and Spain/Ireland/Italy, over-dependent on housing construction or increasingly uncompetitive and feeling the strain of a strong euro. Our hope that rising consumption in the Eurozone could cushion the slowdown in exports and construction activity is now in doubt, and we believe that analysts are far too optimistic about corporate profit forecasts. We remain negative on regional markets, even though in sterling terms they have not underperformed FTSE this year.

Far East

What Slowdown?

China has revised up its 2007 GDP growth rate from 11.4% to 11.9%, largely on the strength of the service sector, and Q1 Foreign Direct Investment rose by 61.3% yoy. Despite falling US prime rates, which should have benefited the HK property sector, the HK market suffered a sharp decline, reflecting rising fears of a US recession and the impact of some derivative trades on private investors. At the same time the domestic Chinese A-share market fell sharply.

There has been little new to say about the Japanese economy this quarter. Even though Q4 GDP growth was confirmed at 0.9%, well above expectations, the country remains heavily dependent on exports at a time when the yen has been soaring as the carry trade is unwinding and US demand is eroding. Wages are flat, bonuses are down and inflation is rising, putting pressure on consumption. The quality of government is abysmal, with the parties continuing to squabble over the appointment of a new head of the Bank of Japan, only a week before the present incumbent was due to leave his post, and at a time of turmoil in the global credit markets.

Even though the market has never been so cheap, and dividend yields exceed bond yields for only the third time in twenty years (each previous time the market staged an impressive rally), investors are at a loss as to what would catalyse buying interest. The fact that companies, with the support of government, have loaded themselves with poison pills to resist pressure from activist investors, is a further disincentive. The strength of the yen has cushioned the returns to UK investors in sterling terms, but it is hard to see how the Index can advance if the currency remains at current levels. The combination of bad news about Bear Stearns and a strong yen pushed the Topix Index below our long-term target of 1200 before a recovery. Following this period of weakness, we believe some good value is beginning to appear in both Japan and parts of Asia - especially Taiwan and Korea - but would continue to avoid the exporters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.