Taking Stock

Away from the furore of BP and the on-going vilification of Tony Hayward, there is plenty of news in the investment world.  It can hardly have escaped anyone’s notice that the “emergency” budget is out this week and equally it will come as little surprise that it is likely to unveil tough measures, with phrases such as “the age of austerity” being bandied about.  Much of the budget has been well trailed: we are all aware that there are likely to be fairly substantial cuts in the public sector, probably focusing on pay and pensions.  We also know that there is likely to be a change in capital gains tax, although the compromise between the Liberal Democrats’ view (40% and cutting the annual allowance to £2,000) and the Conservatives’ reticence to make substantial changes will be interesting to see.  In addition there is likely to be changes to the current VAT regime; most VAT rates in Europe fall into the 19 – 21% range, making our current rate of 17.5% seem a little low.  On the positive side, there is likely to be some good news on corporation tax, as this would send a signal about the importance of private sector wealth creation.

Despite all these uncertainties facing the market, a more positive tone has crept in over recent weeks.  We have seen the FTSE 100 rebound decisively off the lows seen towards the end of May – so much for “sell in May and go away”!  Indeed without the BP effect the market would be higher than it is now and it has risen well over 6% from its recent low at the end of last month. 

There are also some more positive comments tentatively emerging from Europe, despite the on-going sovereign debt crisis, particularly in relation to Greece.  There has been an increasing number of comments which note the disparity between corporate profitability on the one hand and government debt on the other.  So much attention seems to have been focused on sovereign debt (particularly for the “PIIGS” countries – Portugal, Ireland, Italy, Greece and Spain) that the rebound in industrial production, helped by the weakness in the euro, seems to have been ignored.  An upturn in industrial activity should lead to an improvement in the employment situation and a general rebound in economic prospects for much of the Eurozone.

It is hard to judge the general market mood at the moment: on the one hand there are still a number of (potentially very) negative factors in play, but on the other hand there is value in the market and in the current low interest rate scenario, relatively few investments that offer comparable yields.  Trying to look through all this short term “noise” is far from easy and it is often a question of holding one’s nerve and taking a long term view.  There are, after all, a substantial number of companies in the FTSE 100 which yield more than 5% with potential for growth in dividend income and capital value in the years to come. 

Disclaimer

This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested.  The views expressed are those of the author and not necessarily of SWIM.

Note to editors

Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited.  Authorised and regulated by the Financial Services Authority. Registered number 131816.