OECD Figures Do Not Stack Up
Another week, another step on the road to recovery, another investment opportunity come and gone. There are many reasons to remain cheerful and to hang on to UK shares while buying on the dips.
The biggest headlines were grabbed by the OECD, whose forecasts have hitherto been scorned by the press and by economic commentators including myself. Suddenly the OECD is every Briton’s best friend for suggesting that growth in the UK economy could hit the equivalent of 3.5% in the second half of this year.
Optimist that I am, I cannot make the OECD estimates stack up, so I retain my scepticism of an organisation that seems to play catch up rather than make meaningful forecasts. The OECD has almost doubled its estimate for this year from 0.8% (which was so obviously behind developments when it was issued four months ago) to 1.5%, which is again clearly behind the mark.
Economists were starting to revise upwards to at least 1.3% even before the last OECD forecast and I was far from alone in suggesting 1.5% a few weeks ago. At this point we should be looking at how far to revise 1.5% upwards and the way things are going I will stick my neck out and say that 2% is easily attainable.
A lot could go wrong. The West could decide to express its outrage at the killing of innocent civilians in Syria by sending missiles to kill more innocent civilians, such is the desire to show how civilised we are. The rise in oil prices as a result of this threat will put a damper on the UK economy and add to inflationary pressures.
Then there is the eurozone, still heavily mired in recession with debt problems that slumber but refuse to die. Developing markets that led growth in the past few years are slowing appreciably and at home household incomes continue to be squeezed as inflation outstrips wage rises.
However, we achieved growth of 0.3% in the first quarter and 0.7% in the second, taking us to 1%. It is not unreasonable to hope that we will manage 0.7% in the third quarter, given that indications so far for construction, manufacturing, services, car manufacturing, housing and exports are all more hopeful than at this stage in the second quarter. A modest improvement of 0.3% in the final quarter takes us to a cumulative 2%.
The OECD forecast implies growth of only 0.25% in each of the final two quarters of 2013. How does this square up with the OECD’s notion of annualised growth of 3.5% in the second half? Let us assume we build up gradually. That still means quarterly growth will build upwards from 0.7%, giving annual growth somewhere around 2.5%.
The one thing I will forecast with absolute certainty is that the OECD will be hastily revising its figures later this year and will still be out of date before its figures hit the headlines.
Balfour Bucks Up
Shares in Balfour Beatty (BBY) are once again showing a profit in my portfolio, albeit a tiny one. Balfour is a major constituent and I was several hundred pounds down after a profit warning hit the share price.
I took the view initially to top up my holding because I thought the sell-off was overdone. Subsequently I decided not to buy more shares because I was already overweight in Balfour and could not justify risking a further investment. I took both decisions on the merits of the shares at the time, seeing any further purchase as an entirely separate assessment from my original investment. The fact that further investment would reduce my average buying price did not come into it.
I suggest that all investors should take that attitude when they consider topping up existing investments. Treat each proposed purchase as a separate decision and ignore the effect on your average price.
Flight of Fancy
I have recorded my dislike of airline shares several times before so feel free to take what follows as justifying my prejudice if you wish.
Ryanair (RYA), one of the more successful airlines and the one I would have picked as the best of a bad bunch, stunned the markets this week by warning that profits would be at the bottom end of previous indications, and might even fall short. It blamed a dip in fares for this month and for October and November.
EasyJet (EZJ) followed up with strong growth in passenger numbers so it looks as if some of those passengers have switched from Ryanair. Other airlines have been optimistic recently, but then so was Ryanair before this week.
Oil prices are rising and Ryanair, which rarely does things by halves, is now launching a price war. I’m staying off the flight list.
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.
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