By GRAHAM FROST 13/01/2006
[Graham Frost recently joined Bestinvest as Chief Investment Officer]
As per the last article, 2005 was an easy year to make money. Looking forward, while we don't like to make big bets on specific asset types or markets, it is important to reflect on the outlook for key markets when making investment decisions. Here are our views:
UK Equities
2005 saw a slowdown in the UK economy, with high oil prices, a cooling housing market and slow growth in Europe widely held as key culprits. High street retailers also moaned for much of the year that consumers were spending too little, suggesting that the slowdown is all too real (consumers drive around two thirds of the economy).
In spite of this the stockmarket blossomed in 2005, with many companies announcing healthy profits and dividends. This also led to increased merger and acquisition activity.
| "To date inflation appears to have coped with soaring energy prices..." |
Looking forward the outlook is far from grim. The much feared house price crash has not (yet) materialised, which boosts consumer confidence, and corporate balance sheets look strong. The biggest single threat is inflation; if this starts to run away then the Bank of England will likely raise interest rates – bad news for consumer demand. To date inflation appears to have coped with soaring energy prices, whether it can continue to do so remains to be seen.
Global Equities
China, the world’s manufacturing powerhouse, continues to grow at double digit rates. However, as a big net exporter China is at risk if high energy prices cause global demand to weaken.
Europe’s economic position appears to be improving, as signalled by the European Central Bank raising interest rates for the first time in five years back in December. However, much of this is due to a surge in global demand. If this drops during 2006 then stockmarkets could suffer.
In the face of a difficult 2005 (high oil prices, hurricanes and rising interest rates) the US economy appears to have coped quite well. Company profits are high and unemployment low, so the outlook is reasonable.
| "Japan was certainly the success story of 2005." |
Japan was certainly the success story of 2005. There is no doubt that, after several years of restructuring, companies are now leaner and meaner. Employment has increased which should be good news for domestic demand. It may not be a smooth ride, but Japan looks set for a continued recovery.
Fixed Interest
Strong corporate bond performance in recent years means yields are now looking rather unattractive. The additional yield that investors are getting for taking on risk (by buying bonds issued by companies rather than governments) is also low compared to historical levels. Rising inflation would spell bad news for fixed interest investors (because capital is worth less in real terms). It’s hard to get excited by fixed interest at present but it remains a necessary portfolio diversifier.
Commercial Property
Surging investor demand pushed up prices during 2004/05, boosting overall returns. This cannot continue indefinitely, so returns moving forward may be more reliant on growth in rental income.
Commodities
High global demand, from China in particular, has sent prices sky high in recent years. Commodities are a good diversifier and we don’t expect a crash in the near term, but volatility is high so exposure should be kept at a sensible level (we would suggest no more than 5-10% of a portfolio).
Now would be an opportune time to ensure your portfolio has a sensible spread of investments appropriate to your objectives. Bestinvest clients can review their portfolio in the Client Centre, otherwise our free Portfolio Analyser can help you comprehensively review your investments in a matter of minutes.