UK Markets – Peering Into 2010

With the FTSE100 index up well over 20% on the year so far I suppose that we must see 2009 as having been a pretty good year for equity markets. Of course, as a highly respected Edinburgh based fund manager pointed out on Radio 4 this morning, the FTSE100 index is still actually little higher than it was about twelve years ago! Time then to ask the questions…

Are UK Markets Overvalued?
Three months ago I readily admit to a belief that UK and indeed US stocks were beginning to look more than overvalued. However, despite the headline index level showing little more than flat performance over the past two to three months there has been a reasonable level of sector correction in important areas such as banks. Whilst it would be wrong to suggest that stocks are cheap as we enter into 2010, despite huge worries over the direction that the UK economy will take and of how a new government will act to bring the books closer to necessary balance, I am not in the camp that believes the equity market will end 2010 flat or even down. Of course there are plenty of grey areas meaning a belief that sectors such as retail may be headed into a far more difficult year that the one about to end. I see little improvement in the fortunes of the pound Sterling next year and yet given the expectation that interest rates will begin to rise outside of the UK and that inflation cloud pressures will also begin to gather in 2010 I suspect UK rates will rise by 1% to 1.5% through the year. On the plus side, given that larger corporates end 2009 in a far more reasonable condition than the one that most of us feared a year ago we may I believe substantially reduce fears that a spate of large rights issues are on the cards – unless of course they are to fund a new round of consolidation opportunities that have presented themselves. In short, my end year projection for the FTSE100 in 2010 is 5700.

UK Growth?
Following something like a 4.5% decline in GDP for the year visible signs of specific Q4 ‘growth’ around 0.4% should appear when the final figure for 2009 is announced late January. For 2010 ‘growth’ my figure would be slightly less than 1% for the year and with a gradual decline in growth to begin to possibly reappear in Q2 2010 or maybe not until Q3. I would be slightly more positive about growth in 2011 but much will depend on who wins the 2009 General Election. Regular readers will know that I detest the much abused word ‘growth’ that is used so often by politicians. Growth, in my book, only starts when GDP has recovered to its past peak.

Is the UK Headed Toward Being Another Greece?
Despite the £178bn that New Labour has added to the national debt this year alone and the similar amount it plans to borrow in 2010 and despite the prospect of the UK national debt rising potentially to maybe £1.5 trillion I very much doubt that one either should compare Britain’s substantial budget deficit and overall debt plight to being comparable with that of Greece. To be sure we are in a hell of a mess and one that will take the best part of a generation to work our way through. And even though I may have a particular loathing for how the Brown government has handled the post trauma economy [the period subsequent to the bank bail phase that began two thirds of the way through 2008] the bottom line is that I do believe the UK economic situation is unmanageable – provided of course that a new government steps up to the plate and along with everyone else finally accepts the depth and extent of what is in my view a repeat performance of the peculiarly British problem of living well beyond our means. How so a peculiarly British problem you may ask? Simply because apart from loving living beyond our means and attempting to kick well above our weight politically, diplomatically and economically, Britain is almost alone it seems amongst the peer G8 group of large, mature economies that has this unfortunate habit of looking back and basing just about everything on what has gone before. Translate that and it means that the British in my view have long been the past masters at failing to accept that they have a problem to solve at all. Is that about to change – could if they secure a win in the General Election next year Messrs Cameron and Osborne really change an attitude that has so often over the past one-hundred or so years caused us to be master designers of our own misfortunes? Of course, no-one is perfect but I actually think that if they really do have the will and the passion to succeed that they actually can and will steer us through this horrid economic maze. Do I believe they have the will – yes I think that they do. Do I think that the public is ready for a philosophy of pain for gain? I certainly hope that it is!

More Job Cuts?
I am afraid plenty more job cuts are on the cards although outside of the public sector on a reduced scale from what was witnessed in 2009. Job cuts as the CBI painfully points out today are a lagging indicator. Maybe so but given the extent of public sector cuts necessary if Britain is to just go part way toward living within its means years into the future then I suspect the impact of public sector job losses late into 2010 – particularly through the civil service – plus the impact that reduced pension benefit [something that I believe the Tories if they are elected will be forced to push through all areas of public sector employment] then I guess we must build the impact of this into any model of growth. Overall I agree with the likelihood that UK unemployment will gradually rise to 2.8 million towards the end of next year. Worryingly I see no opportunities for wealth creation – new jobs being created through investment by the corporate sector in 2010 – and that includes banking and financial service industries and importantly, the legal profession.

Property?
House prices will end the year at around the levels they begin it and perhaps just very slightly above in the mid end range. Meanwhile during the year I suspect a small dip in the small house/flat end and also at the top end – £1m plus – during the remaining months of winter into the spring before minimal levels of recovery might be seen. Overall I continue to see house markets being held up through deep seated pent up demand although levels of general activity will likely remain at current or slightly more subdued levels than seen over the past month. Whilst I take on board the Bank of England warning over the potential of commercial property loan write downs [it is also reported that around £160bn of commercial property sector loans will need to be refinanced between 2009 and 2013] I do not believe that another huge problem is building. Indeed, given the very apparent slow down in construction of new commercial property and the already high level of commercial property write down [likely in the region of 35% to 42% since 2008] I would suggest that the sector may also begin to look far more attractive to domestic and foreign investors perhaps during the second half of 2010.

Will a General election Change anything?
From a motivational angle and likely corporate sector belief that [assuming the Tories win] the next government will do nothing underhand that might further undermine the already weakened industry and commercial sectors I guess that we might, despite the pain for gain theory and practice, see more of a swing in the step of those that have so far managed to survive the 2008/9 economic crisis. Of course, Rome was not built in a day and neither can the British economy be completely built in anything less than a generation. We have to rebase and accept our many weaknesses and our natural contempt of what has probably been staring us in the face for years. That rebasing must somehow mean the government doing whatever it can to push for renewed investment including a reborn attitude to research and development investment – in other words, a reborn attitude to the importance of investment in and by the manufacturing sectors as well. The future will not be all about propping up – it must be about investing in new technology areas and carving out a very different future that can and will in an entrepreneurial nation such as this very possible if the strengths of those leaving our universities put together with the experience of older hands is harnessed with that of a government that sees a new way forward.

Of Banks and other Financial Markets…
I like many others am frankly appalled that our government has been allowed with all too little challenge to so easily pull the wool over the electors’ eyes by blaming all the current woes on the banks. I am also appalled about what I am seeing in terms of the constraints being placed on bankers’ remuneration and the huge damage that is being caused by our government effectively handing over regulation of the UK banking and financial sectors to the EU. Just like sixty odd years ago when we gave away the keys to the jet engine, we are allowing ourselves to be sold down the river by a far from adequate government that has had little clue when it comes to running the economy with a degree of prudence. Restrain the UK banking industry in the manner that has been laid down by this government in both the Pre Budget Report and the new Financial Services Act and you are at a stroke choking the only goose left in town that can produce sustainable eggs. I will not repeat what others have said in more vociferous terms with regard to bank bonuses and I readily admit the system of payment and remuneration isn’t exactly perfect in some cases. But if a free market system is to work then governments cannot and should not attempt to interfere with private sector remuneration. Effectively taxing bonuses twice is both unreasonable and unfair even if it is a one off before an agreed form of self regulation comes into effect next year. Still just as Mrs Thatcher was never for turning so it is that the hapless Gordon Brown was never one for listening.

Some of My Fears (in no particular order):

That the banking and financial industry will indeed be irreparably damaged by actions included/proposed in the new Financial Services act and most particularly from the current government proposals with regard to remuneration and future regulation emanating from EU derived policy.

That Britain once again fails to learn the lessons of the need to compete and that the world no longer owes us a living.

That the cost of the government calling on gilt markets for so much cash becomes unsustainable.

That even if a Tory government takes the reins of power during 2010 they find that there is too little that they can do on the first point above to change anything unless of course, they decide to walk completely away for the EU.

That the increasing likelihood of a double-dip recession specific to the UK will be accompanied by the need to raise interest rates to fight rising inflation.

As hinted above, that the rest of the world goes forward in economic terms whilst Britain goes further back.

That no one bothers to look at the worsening balance of payments deficit!

That the pound sterling falls off a cliff.

That the dollar continues to fall at the expense of the Euro and Yen further exacerbating renewed fears that the global recession may not be over yet.

That the position in Pakistan, Iran and North Korea worsens, that the situation in Afghanistan and Iraq also worsens.

That the British public fails to be aware of the importance of the NATO alliance.

That the blame game for what we have gone through during the two awful past years will necessarily gather momentum during 2010 but that it will let far too many people and organisations viz. viz. Gordon Brown, Alan Greenspan, the rating agencies and maybe the odd former head of a bank off the hook. So, if we can have an enquiry about Iraq let the new UK government have an enquiry about the failure to observe necessary risk and specifically, the 2008/9 collapse of the UK economy.

That [assuming they win] the Tories go too far in their hunt to save costs by further weakening defence.

That Gordon Brown might amazingly and beyond the realms of comprehension actually manage to wins another term in Government!

That dumbing down across the media goes on unabated.

That we forget that Global warming presents substantial opportunities as for UK industry, commerce – for universities working in collaboration with British industry and so on.

Surely that is enough from me for now………

Howard Wheeldon is the Senior Strategist at BGC Partners