By MARCEL PORCHERON 17/02/2006
Recent data from the Department for Constitutional Affairs shows that the number of properties repossessed during 2005 increased by 70% on 2004. The final quarter figure for repossession actions started, of 31,018, was the highest since the early 1990’s. High levels of repossessions in 1990 and 1991 led to a steep fall in property prices because lenders were prepared sell properties at almost any price to recover their debts. Could we be in for a repeat of that unpleasant experience?
It is too soon to be sure but Department of Trade and Industry insolvency figures are also grim: nearly 70,000 people became bankrupt in 2005, the highest since records began. Of these a record 20,461 occurred in the last quarter, a 57% annual rise. UK individuals have borrowed more than ever before; at the end of December 2005 the total UK personal debt was £1,158 billion, over twice the level of 10 years ago. Having risen by 10.2% over the past year it shows no signs of slowing but it would come as no surprise if the banks began to tighten their lending criteria, which would result in some people running out of credit.
| "It would come as no surprise if the banks began to tighten their lending crietria..." |
Even if you are not directly affected by the above, it remains a very real concern. Should house prices fall and insolvencies continue to rise , it will dent consumer confidence, hence retail spending. Because consumers drive around 2/3rds of the UK economy this would have implications for many sectors. However, the UK stockmarket is less representative of the economy than at any time in history. According to recent research from Schroders:
- Manufacturing still accounts for 16% of the economy but less than 3% of the stockmarket.
- Oil and mining represent less than 3% of UK GDP but over 20% of the market.
- Overseas sales of non-financial companies in the FTSE 100 now account for 60% of revenues.
With this in mind the Independent newspaper has recently launched its own Indy 100 Index, intended to reflect more accurately the health of the UK economy than existing indices. The new index, comprised of companies from both FTSE and AiM, aims to pick members based on their contribution to the UK economy. This means that companies with significant operations abroad, such as GlaxoSmithKline, HSBC, ICI and Vodafone are out. For example, just 16.3 million of Vodafone’s 169.3 million customers are in the UK.
| "Looking at the bigger picture, the US and UK both suffer from similar structural weaknesses..." |
Important contributors to the UK economy include public services (21%) and ‘letting of dwellings’ (9%), which means support services companies with public sector contracts and estate agents feature in the Index. Retailers and utility companies also feature prominently. Another key difference between this and the FTSE Indices is that it is not weighted, hence it will not become dominated by a handful of the largest companies.
A notional back history for the Indy 100 shows the index to be less volatile than the UK stock market as a whole and currently standing at record levels.