Last Rights
You wouldn’t think it to see Sir Mervyn King’s deadpan, almost somnolent, public performances but this is a man of unbridled optimism whose forecasts should be treated with suspicion. Nonetheless, his final pronouncement is on the right track. For once, he should be believed.
The Governor of the Bank of England believes that recovery is now underway, with a projection of 0.5% growth in the second quarter to follow the 0.3% achieved in the first three months of 2013. We are still only half way through the latest quarter so it is early days, but King will have some indications of how the economy fared in April.
He is sensibly more obscure about what happens after that, settling for growth to be ‘a little stronger’ than he expected three months ago but with the economy ‘likely to remain weak by historical standards’.
Frankly, growth of any sort will be rather welcome and I suspect that King is if anything underestimating the recovery with his judgement that we will just about manage 1% expansion in GDP this year. Likewise his suggestion that inflation will peak at a slightly lower than expected 3.1% in June.
I have often pointed out in this column that the Bank of England has tended to be overoptimistic in its forecasts, particularly on inflation, but not this time.
Taking inflation first, the fall in petrol and diesel prices will have a knock on effect, reducing inflationary pressures across the board. Against that is the continuing, and if anything worsening, effect of inflation on food prices. Taking one thing with another, King looks pretty well spot on.
On economic growth, we have already had 0.3% in the first quarter. Adding 0.5% in the second quarter would take us to 0.8%, leaving us needing only 0.1% in each of the final two quarters to reach 1%. I suspect that King is so unsure of the second quarter forecast that he is leaving scope for manoeuvre in the final six months. Nonetheless, a second quarter of only 0.3% would still leave us well placed so there is some leeway.
GDP figures tend to be revised upwards over time, which is happening to last year’s figures. The six-year recession is not over yet but this time next year we should be able to say that the recovery is underway.
Unfortunately for investors, that recovery has already been factored into one of the economy’s leading indicators, the stock market, which this week topped 6,700 points. I have commented before on the fact that companies worth backing have already been backed and that bargains are harder to come by. The days of 5-6% yields are fast fading and investors have only themselves to blame if they missed the opportunity.
However, there are still plenty of solid opportunities in a wide range of sectors to pick up yields of more than the long-term average of 3.5%. Within the FTSE 100 index, that includes Marks & Spencer (MKS), BAE Systems (BA.), HSBC (HSBA), CRH (CRH), National Grid (NG.), Centrica (CNA), Legal & General (LGEN), BHP Billiton (BLT), British Land (BLND) and Sainsbury (SBRY).
Little and Large
I am occasionally asked by readers for my views on smaller companies and the AIM market. This topic has been given a fresh boost by Budget proposals to scrap stamp duty on the purchase of AIM stocks and by the possibility that AIM stocks could be allowed to form part of ISAs.
The removal of stamp duty from next April will alleviate, though not entirely compensate for, the wide spread that exists on most AIM stocks between the buying and selling prices. AIM stocks, being less liquid, will still have to rise further to wipe out dealing costs and show a profit. I would thus not touch any AIM stock that did not pay a dividend.
I looked at three decent prospects on the AIM market this week: online clothing retailer ASOS (ASC) had a spread of 3,762-3,774p; Majestic Wine (MJW) 425.25-427.5p; and James Halstead (JHD) 290-295p.
I am not saying investors should boycott the AIM market, just that I would want a compelling story to take a chance. Incidentally, plans to put AIM stocks in ISAs are still subject to a consultation process. So the changes on stamp duty and ISAs have not happened yet.
My concerns about investing in smaller companies on the main market are similar to those for larger companies, only more so. Contrary to popular belief, smaller companies react more quickly than larger ones when the market turns and that has been true since the recovery from the financial crisis began.
In other words, good news was factored into the FTSE 250 and Smaller Companies indices before the FTSE 100. Similarly, if the market tops out then smaller companies will lead the way down.
Over-Cooked
Well done anyone who ignored my serious concerns over travel group Thomas Cook (TCG), whose shares nearly fell into single figures but are now back to three digits. It is highly risky to try to catch falling knives so the fact that this company was offering the handle rather than the blade does not negate the general argument that investors may be wiped out when a company gets into serious trouble.
For every Thomas Cook there is a Woolworths, a Jessops, an HMV, a Jarvis…I could go on.
Cook shareholders now face a new dilemma over whether to take up their rights in a share placing announced this week. Do consider taking profits and selling out while the going is good. If you believe that the share price recovery will continue, take up your rights.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
UK Market Performance May 13-17
FTSE 100 Index: Pending
FTSE 250 Index: Pending
FTSE UK All Share Index: Pending
FTSE Small Cap Index: Pending
FTSE AIM 100 Index: Pending
FTSE Fledgling Index: Pending
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