The UK should expect a ‘short and sharp' recession in the near future and companies therefore need to revise their 2008 profit expectations down 5%, Resolution Asset Management (RAM) warns.
RAM CIO Peter Reid says the looming recession will not be avoided by aggressive interest rate cuts and corporate profits remain too optimistic.
While Reid expects only a brief negative growth period, he says the economy is unlikely to meaningfully pick up until the middle of next year at the earliest.
“The consensus is for UK profits to grow 7-8% in 2008, but we don’t think this will be the case, especially given that profit margins are starting from a very high level already,” he says.
“In my view profit expectations need to come down closer to flat year-on-year to reflect what will be a very difficult environment for firms over the next 18 months or so.
“Sovereign funds are helping but financial institutions are still finding it difficult to lend and this will continue to hit the underlying economy. This simply cannot be fixed by rate cuts alone.”
Despite his gloomy outlook, Reid believes markets are beginning to be priced by the negativity and value is emerging. He expects to see positive returns from the stock market over the next 18 months, albeit with periods of extreme volatility.
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