Central Banks are trying to shore up the systems mistakes; however other ones just keep creeping up. Temporary filler in our opinion is not addressing the real fundamental issues. We are going to look into two which are causing headlines in the UK.
1. The unemployment rate is steadily increasing. We expect this trend to significantly rise in the upcoming months as the city starts revealing their cost cutting strategies. I would not be surprised if we broke the 6% barrier by the end of this year.
2. Double Whammy - Property prices are deteriorating and the cost of living is increasing. The government figures are showing just over 4% inflation. The real impact is significantly higher and is starting to bite into people’s discretionary income, while property prices are spiralling down 10% year-over-year.
Highlights:
- Profit expectations for 2008 have been revised down for almost every sector in the past 3 months. Resources and household goods and textiles remain in positive territory.
- Defensives, large cap non financials a better play until the smoke clears.
- Profit revisions for the FTSE excluding financials are flat which is quite good in this climate.
- Markets are cheap but buyers beware! In the global context UK is trading in line with most other European markets.
In the Numbers
- FTSE All Share 2008 EPS growth rate is 1% , which has been revised down 5.5% over the last 3 months.
Bulls – Performance (3 month EPS 07 revisions %)
FTSE Resources +8%
FTSE Household Goods & Textiles +2%
FTSE Pharmaceuticals & Biotechnology -2%
Bears - Performance (3 month EPS 08 revisions %)
Construction & Building Materials -26%
Banks -25%
Basic Industries -23%
Scorecard: Performance of the FTSE All Share (Excluding Investment Trusts)
Conditions are getting worse and we are not far from intensive care. The real fundamental issues need to be addressed however political agendas may take the forefront. As such, valuation and income may not be the best way to analyse opportunities in the near term.
We recommend staying on the sidelines until some of the smoke clears. Gold, silver, Yen and cash would be my safe haven bets until we see a significant turning point.
These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For any comments please contact rakhitreport@yahoo.co.uk.