Market Outlook | Outlook For UK Economy - Your Views

15th Sep '17 by Tortoise investor

12 comments 5273 reads

Do Stockopedia readers have a personal view on the outlook for the UK economy at the moment? I appreciate it's all educated guesswork but it's obviously important for considering what to do with one's portfolio.

For me there are some contradictory signals. E.g. Safestyle UK (LON:SFE) recent update made me nervous that we're on the verge of a recession if a big ticket item like double-glazing has seen a big slump (I consider Safestyle UK (LON:SFE) a well-run company so don't consider it a company specific problem). Recent figures also suggested the construction industry has slumped in August albeit only compared with activity over the last 12 months. On the other hand yesterday Next (LON:NXT) seemed to be a bit more relaxed about the near-term outlook for its business. Has anyone seen any other interesting comments from recent RNS'? The rising £ may also complicate matters.

I'm currently leaning towards a possible near-term recession albeit nowhere near as bad as the last one. I'm therefore tending to stay away from anything too cyclical and have been moving more and more of my positions into cash.

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vik2001

15th Sep '17

I don't think there be a world recession, theres not enough reasons for a recession. for something major to happen there needs to be a trigger point like the 2007/8 financial crisis. I don't think theres something as major as that around the corner. theres other macro events like the korea situation, GBP value, etc.
housing will still be ok as long as the interest rates don't jump overly high, when interest rates shoot up to around 4% that's when I believe the bubble will pop for the uk housing market.

the stock market could change direction from growth to a value play, leading to some sort of correction. when everything gets highly priced this is where value comes into play, so the market could switch direction which is more of what im anticipating.

a correction to be honest is needed because at some point people will get scared of the markets melting, and a correction will help restore confidence. lets face it no one at the moment is looking to pump to much money in on the fear of a crash, so a correction is needed and most probably be welcome.

im 40% invested, and 60% cash and looking at stocks which have had a drop and have value in them for now

JohnEustace

It's getting harder to find things to buy, isn't it? Paul Scott called time on the momentum trade and I agree with him, regretfully because it's been a good trend for me.
Also with the BoE talking the pound up the easy gains from converting dollar earnings to pounds are in reversal.
So I'm staying well clear of anything illiquid and staying long the pound against the dollar to hedge my US holdings. At some point surely the BoE need to stop crying wolf and actually increase rates a little.

Retail Punter

I think it all depends on the outcome of the Brexit negotiations, currently stuck in an acrimonious stalemate. If the UK doesn't get a deal, then I'd expect a recession, and I expect the UK would suffer more than the EU in the short term at least. There seem to be some serious obstacles to getting a deal, such as the EU's need to punish the UK for leaving, and the payment of a large Brexit bill being politically unacceptable in the UK. It seems clear that the EU believes it has the upper hand, and they think that Theresa May is bluffing when she says that no deal is better than a bad deal. I would have thought that there's scope for the UK to pay something in return for a trading arrangement that's worse than what it currently enjoys, but I find it hard to call.

Tortoise investor

In the UK inflation could overtake wages and reduce spending power. Coupled with fears over Brexit that might cause a technical recession. I tend to agree there aren't grounds for thinking there will be a recession as bad as 07/08 in the near future.

Logic

A bit tired so bear (no pun intended) with me if I am not expressing myself as clearly as I intend, and this all looks like bulls*** to you (yes, pun intended).

I am afraid that my view on the UK economy as a whole is not entirely of sunny uplands with milk and honey and reincarnating cakes.

1. The pound and exports: After the vote to trigger article 50, the pound has fallen. While much was said (initially at least) about how good this would be for exports, a weak pound has not been overly beneficial to the UK in the past.

2. The pound and imports and inflation: More concerning, however, is that the UK imports a lot of goods, and the increase in costs being passed onto consumers results in inflation. While it is true that the inflation rate in the UK has been below target for some time, there is quite some difference between inflation due to increased costs of importing and inflation due to recovering economy and wage growth. Increasing interest rates will strengthen the pound, but does so at the expense of the UK economy. In addition, an Englishman's home is his castle, his investment, his debt and his obsession. If interest rates go up and house prices drop significantly (with or without resulting in significant defaults on mortgages), government approval ratings will tumble. While there are other ways to prop up the prices (more help to buy, allowing tax deductions for mortgages, etc) it is in the government's interest to try to avoid such a situation. Whether they would be able to influence BoE is a different matter, I suppose.

3. Uncertainty with Brexit: The negotiations are not going brilliant. Essentially, the European Union remains an arena for UK politicians to try to score domestic votes. The downside of this is that while it may improve the approval of voters, it will have the reverse effect on foreign politicians. The only upside is that EU does not care nearly as much about this matter as UK (listen to Juncker's state of the union speech). However, so far it does seem that the UK does a lot of talking about how it will not do what the EU suggests, and then quietly agrees (initially the UK were going to negotiate trade in parallel but then dropped that demand, etc). It seems that there is increasing acceptance of an extension of current terms on the UK side, which will hopefully allow for a smoother exit. The best for UK business, in my opinion, will be continued access to the common market but due to the attached costs and freedoms it may not be politically palatable. Looking at Theresa Mays decisions in the past, I am not convinced she will pick what is best for the country over what is best for herself and/or her party.

4. This time it is different: I know that the suggestion that "this time it is different" is usually untrue. However, at the moment, quantitative easing has distorted the markets and the low interest rates mean that companies with less impressive financials have managed just fine. In addition, the low interest rates have allowed for UK households to take on much greater amount of debt (which has helped drive the economy through consumption). This gives a false image of the health of the finances of UK households and companies.

If I had to wager a guess, we will see much talking in the tabloids about how May will fight the EU, although in actual fact there will be much acquiescence to EU demands, and UK will try to slide into an extension of current terms. The BoE will not significantly increase interest rates (maybe a token increase and then nothing for a while), and inflation will reduce real incomes. The UK economy will underperform the EU but will not crash. The FTSE100 may well look good on paper, but the increases may driven by exchange rate and eaten up by inflation.

Or maybe we will eat cake that never disappears. It is possible. I just think it is less likely.

ambrosia

17th Sep '17

"Looking at Theresa Mays decisions in the past, I am not convinced she will pick what is best for the country over what is best for herself and/or her party"

I hate it when stuff like that is said because its probably true

Mancman

From my experience as someone trying to sell a house the property market is in a parlous state, which is usually a bad sign for the UK economy. I don't think the much celebrated employment statistics give much of an insight into the real state of the economy: too much household debt, static or even falling real wages, plus the added uncertainty occasioned by Brexit. It is very difficult/impossible to see how all this will play out. I am happy to have a larger than usual allocation of cash in my portfolio, and some gold.

pennri

18th Sep '17

Logic has nicely encapsulated my thoughts on the current state of the economy and likely outcomes.. The one thing i would add to that is the scale of unwinding QE. This and interest rate rises over the medium term will negatively impact the markets as capital is withdrawn. How much this will effect the markets is yet to be seen. Interesting times indeed!

jonesj

I'm about 89% stocks, 10% cash, 1% gold. Not all of the cash is in GBP.

My stock classification system is according to my own system, so:

Looking at only the stock portfolio, 13.15% is currently in UK economy exposed stocks, including a 6% position in Begbies Traynor (an insolvency practitioner).
A further 6.5% are what I class as multi nationals, including Shell, BP, IMB & Paypal.
The remainder (>80%) is in Investment Trusts & overseas companies

So you might correctly conclude I am not optimistic about the UK economy, taking a long term view.

19th Sep '17

While 13% may seem like a low proportion (for a UK investor), it is worth noting that the UK economy (measured by GDP) is 3.9% of the global economy. To me it just makes you look better diversified (at least geographically) than many other UK investors.

what stock or fund/trust do people use to purchase gold?

SGLN etf for gold. Plus some sovereigns.

Outlook for UK economy - your views

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Tortoise Investor

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