By JOhn Smelt, UK portfolio manager at Aegon Asset Management The UK may have weathered the wors...
By JOhn Smelt, UK portfolio manager at Aegon Asset Management
The UK may have weathered the worst of the global downturn to emerge as the leading G7 economy, but we are not out of the woods yet and investors need to keep their optimism in check as they prepare for another white-knuckle ride on the equity markets.
It could be argued that the UK is not so much the best performer as the least bad of the major global economies. What is more, having proved itself less volatile than other economies during the slowdown, the UK is likely to recover less strongly during 2002 and may not perform as well as some others.
Its stability in recent months has been due largely to sustained levels of consumer spending. Low interest rates have discouraged saving and encouraged high levels of borrowing. Consequently, significant amounts of cash have found their way into consumers' pockets. This has filtered through to the economy in the form of discretionary spending and boosted retail sales.
Now the balance may be swinging away from the UK. The United States is expected to lead the global recovery later in 2002. The UK suffered less than either Europe or the US during the downturn and is likely to see less of an upswing.
Interest rates are set to rise ' pushing up the cost of borrowing. Unemployment is also set to grow. Our forecasts suggest that as much as 1% of the UK workforce ' nearly 200,000 people ' could lose their jobs this year. These factors will combine to cause a slowdown in consumer spending.
Meanwhile, the UK manufacturing sector ' which has struggled during the global slowdown ' could stage a limited recovery, boosted by positive noises from the other side of the Atlantic.
However, the impact of this recovery is unlikely to be sufficient to offset the anticipated fall in consumer spending. It should, however, deflect some of the responsibility for economic recovery from individuals and bring greater balance to the economy. We do not expect to see this switch in emphasis until the second half of 2002.
How will this affect stock market levels? Not hugely. The market has remained preoccupied by corporate results. Profits will remain weak, and we are unlikely to see much of an improvement this year.
We anticipate some wide variations in sectoral performance. Highly rated sectors such as telecoms, certain technology companies and some of the banks still look overvalued and are likely to struggle.
Stocks that are geared towards economic recovery ' such as mining, construction and media ' will do reasonably well. Such areas have been very much out of favour recently but have shown sharp recoveries as more positive economic data has begun to emerge. We expect this improvement to continue.
However, the best performers in the current environment will be the boring companies ' those that can deliver steady (albeit unspectacular) single-digit growth in profits and dividends. Tobacco is a good example ' health concerns mean the market currently accords this sector a low rating. Nevertheless, its steady profit growth characteristics means it has excellent potential to be re-rated.
UK currently fastest growing G7 economy.
Manufacturing pick-up will restore balance.
Tobacco stocks now offer good value.
UK likely to grow less in 2002.
Corporate profits will show limited growth.
Highly rated sectors like telecoms will suffer.
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