The deteriorating economic environment shows little sign of perking up. The April RICS UK housing ma...
The deteriorating economic environment shows little sign of perking up. The April RICS UK housing market survey was the most pessimistic since 1978, with consumer confidence at its lowest since the early 1990s, while the latest inflation numbers were higher than market expectations. This scenario of stuttering growth and higher inflation makes the Bank of England's balancing act even more difficult.
This is not echoed in the UK stockmarket, which remains buoyant. However, the risk of serious economic slowdown, and its effect on many companies, is underappreciated.
As such, I continue to invest defensively, holding a full weighting in mega-caps, whose strong balance sheets, product and geographic diversification, and attractive valuations should stand them in good stead.
I also like companies with stable earnings streams. As cyclical earnings come under pressure, earnings underpinned by structural forces should command higher market valuations. For example, Shire Pharmaceuticals is very well placed in the growing ADHD market, and is expanding its product range.
A newer trend I observed this year is big macro trades causing stocks to suffer indiscriminately - for example, Invensys and IMI. Ongoing volatile markets will probably uncover many fundamentally sound companies whose market valuations have fallen unfairly. I am also avoiding over-leveraged businesses and companies with exposure to consumer demand, particularly discretionary.
Stressed banks are now seeking to repair their profitability by passing on the pain to others in the form of higher borrowing costs. So while banks were the first to suffer, they could be the 'canaries in the coal mine'. I still remain underweight, but have increased my weighting in response to some welcome developments in the sector.
However, we are far from out of the woods. Businesses must now prepare for a consumer-led economic slowdown that will see corporate margins, profits and, hence, earnings and dividends come under strain.
Therefore, I am maintaining a defensively structured, attractively valued portfolio, which should minimise the risks of negative earnings at stock level.
- The UK stockmarket does not yet reflect the poor economic outlook
- While banks were the first to suffer, they are passing on the pain to others
- Companies with stable earnings streams provide a defence against a slowdown.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress