With the war in Iraq out of the way, attention has now returned to the perennial favourites that drive the UK market: the consumer and the housing market.
A year ago the UK’s benchmark equity index, the FTSE-100, was around the 5,250 mark. At the end of May it was down to around 4,000, a 24% fall over the 12 months. That compares to a 17% fall in the Dow Jones Industrial Average and a more than 30% decline in the Nikkei 225 in the same time. But the story is not that clear cut, as the UK has traded more or less sideways since the start of the year - which may, just may, mean that it has hit a trough.
The question now is whether it can pick itself up. But with high consumer debt and historically low interest rates, it could be a close call.
John Storkerson, UK-based portfolio manager, global core equity, at Putnam Investments, says: “I think that there are reasonable expectations about the market going forward from here.” He’s cautiously optimistic, saying the UK stock market could be “higher at year end than it is now”, though the UK is not one of the firm’s favourite markets. He cites property exposure and possible liabilities in the banking system due to the high levels of consumer debt.
He feels the monetary policy stance of the Bank of England is on a downward trend. Interest rates continue at a 48-year low of 3.75%. “Basically we’re going to see lower interest rates out to year-end.” This would create a better environment for consumer debt. He says that the UK was likely to follow the US example of a very favourable monetary policy which has been supportive for banks.
The view on rates is shared by one of the UK’s best-known economists. “We maintain our view that the repo rate will trough in this cycle at 3%,” says Ciaran Barr, chief UK economist at Deutsche Bank.
Storkerson sees value in the UK’s big oil companies, such as British Petroleum and Shell Transport and Trading. “We feel that energy here is a reasonably positive outlook going forward.” He says the demand for oil looks strong and the companies have strong cash flows. The strength of oil firms will buoy the rest of the market, he reckons. “We have a reasonable market-weighted position in energy.”
The UK consumer is fairly stretched, and becoming choosier, Storkerson says. He feels the housing market is overheated – and there is “confidence but no liquidity” in housing. “I view this as bit of a bubble. Price has gotten ahead of fundamentals.”

As for the pound - Storkerson sees it as occupying a useful niche between the dollar and the euro. “It’s in a pretty good position.” He says the currency’s position outside the euro allows the UK government more room to make decisions than its counterparts in France or Germany.
The position of the pound, plus the fact that many UK companies have restructured, leads Storkerson to believe manufacturers will soon start to reap benefits. “There are some fine companies here in the UK,” he says. The export picture was “pretty reasonable”.
But any real upswing in global growth can only be triggered from one place - the US. “It’s got to come from the US,” Storkerson says. He agrees with Federal Reserve chairman Alan Greenspan that the bias is more favourable for the world’s top economy. “It pays not to fight the Fed.” And the new environment - where companies have put their balance sheets in order and the flow of corporate scandal has been stemmed - has got to present a “healthier outlook for investing”.
Paul Duncombe, deputy managing director at State Street Global Advisors in the UK, says: “The British pound was the worst performer of the major currencies in the first quarter. It started the year on a stable footing as the UK economy had appeared to be one of the more resilient ones.” But Duncombe sees a significant slowing in manufacturing and consumer spending triggering the bank of England’s decision to cut rates.
“In the UK, recent figures show a sharp deceleration in average wage growth which, when combined with increasing evidence of a slowdown in the housing market does not bode well for consumer spending,” says Keith Wade, chief economist at Schroders Investment Management.
He adds: “We have trimmed our growth forecasts as a result.”
Haydn Davies, chief economist at Barclays Global Investors says the manufacturing sector in the UK has been in recession for two years. Industrial output is at an eight-year low.
“The UK has managed to avoid a recession as a result of the strength of the retail sector, which has been buoyed by the boom in household spending, as well as the strength of the service sector.”
But, Davies, says there are now signs that the service sector may also going into the doldrums.
“For the moment,” Davies says, “sentiment towards the pound remains cool, despite the fact that the economic outlook in the UK continues to be much more buoyant than that in the Euro-zone.” As a result, he expects the pound to fall further.

Topics