Trying to write a commentary about the UK stockmarket is very difficult at the moment. But despite t...
Trying to write a commentary about the UK stockmarket is very difficult at the moment. But despite the extreme and rapid daily changes, some strong themes have emerged in the UK economy and stockmarket.
The modern banking model is broken. Rising defaults have triggered bank failures and an almost complete lockdown in new lending. For the banking system to get back to a more sustainable balance between loans, deposits and equity, the overall amount of debt in the economy is going to come down.
This will mean that people who already have a lot of debt are going to be pressurised to pay down some of that debt, and people who want more debt are going to find it very difficult to get it, and it's going to cost a lot more.
My best guess is that we are around halfway through the current mess. The UK economy, therefore, is likely to endure a very difficult economic environment over at least the next 12 months as recession is coming almost everywhere.
The markets are not broken, however. Markets are working fine and doing what they have always done. When new forms of risk-taking work, markets reward them; when they don't work, markets kill them.
Markets, quite rightly, are destroying at the moment. Too many people have believed they can borrow lots of money without thinking how they are going to pay it back. Too many people have lent money without thinking about how they will get their money back.
If markets are left to do their work, these excesses will unwind and these stupid mistakes will not happen again for another 100 years or so. But governments are interfering and unleashing moral hazard, which ultimately will make matters much worse.
Amid the destruction, opportunities are emerging; there are a number of areas in the UK stockmarket where an awful lot of distress is priced in. There are more than 150 UK stocks with a market capitalisation over £100m yielding at least 2% above 20-year gilts. This does not happen very often. There have not been this many stocks this cheap since March 2003. Even in the banking crisis of 1973-74 (when gilt yields were much higher), there were not this many.
Many will struggle to hold their dividends, but unlike in 2003 the cashflow underpinning dividends is stronger. Many companies have been behaving prudently in the run-up to the storm. There are sensible, sound businesses on rather silly, end-of-the-world prices.
There are also attractive growth stocks whose share prices have been dragged down by the general market. These include stocks that benefit from the global boom in infrastructure spending in developing countries and the developed world.
- By Jeremy Lang, manager of the Liontrust First Equity and Dynamic Income Funds
- The modern banking model is broken. The markets, however, are not broken
- Government intervention will prolong the necessary pain we are feeling
- Compelling value is emerging in selected UK stocks.
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