Let’s not be churlish: to see inflation down to the target 2% is a great psychological boost. But let us also be realistic: it is not all good news by a long chalk.
It is possible that some pundits will start to raise the spectre of deflation again – they seem to derive some sense of satisfaction from confronting a misery that is not on the horizon. Japan may have suffered a decade of downward spiral and parts of Europe may be getting a taste of it but the fact is that inflation in the UK has been persistently too high and there is no sign that we are going into reverse.
In fact, the consumer price index eased back only 0.1% in December and prices on the whole are still rising, just not as quickly. In fact, the retail price index has edged higher, not lower, and is still above CPI.
December figures were distorted downwards by panicking retailers discounting their prices. Increases in energy prices, to be offset partly by reductions in green taxes, are still feeding through. Petrol prices, on the other hand, are coming down again.
All in all it’s a mixed picture with a bias towards optimism. Take-home pay is still being squeezed, but not as severely, and more people are finding work so they have pay to take home. The prospect of an early rise in interest rates has receded a little.
Construction
A trading update from Costain (COST) this week was encouraging, especially as the construction sector has failed to recover as strongly as many people, myself included, had hoped. I don’t set much store by the comment that results for the past financial year are ‘in line with the board’s expectations’, which adds nothing new, but I am reassured that the group has ‘continued to perform strongly’ even though that phrase, too, is a little vague.
The better news is that the order book is up 25% from £2.4 billion to £3 billion, of which over 90% is repeat orders, providing good long-term visibility of revenue, and that Costain finished the year with net cash, which is a good idea the nearer we get to the first rise in interest rates.
The yield is around 4% and the dividend is well covered. It looks pretty good and if I had any cash to invest at the moment I would be taking a closer look.
The construction sector on the whole is promising, even if we could have hoped for better signs of improvement at this stage. If you include housebuilders in the wider construction sector you can certainly hope that the good times are rolling.
House prices are now rising across the UK, not just in the south east, and housebuilders are now at the happy stage of the cycle where they build more expensive houses on cheaply acquired land. Admittedly a lot of good news is in the price but this subsector has further to run – just not as quickly as it has over the past three years.
Pharmaceuticals
This sector seems to have come through the trials and tribulations of the past decade as strong as ever. Despite facing loss of patents, attempts by health authorities in various countries to cut down on spending and the uncertainties of developing new blockbusters that can withstand rigorous clinical tests, 
GlaxoSmithKline (GSK), AstraZeneca (AZN) and Shire (SHP) to name but three have combined dividend payments with a rising share price.
AstraZeneca, for instance, is up about 20% since the start of last year despite taking a temporary dip in October after revealing lower sales and profits in the third quarter. Glaxo is a key holding in my portfolio and will stay that way.
The big three all offer decent yields. It is not too late to buy before you join the ranks of the elderly patients.
Recruitment
Companies such as Robert Walters (RWA) and Hays (HAS) saw their shares take off in the first half of 2012 well before the recovery had got going. It was a fair example of how the stock market often anticipates events correctly.
By the late autumn I felt that the surge had run its course but the prospect of UK economic growth becoming entrenched and possibly improving further means that recruitment companies could start to move again.
It’s not a sector for me as I consider it to be too cyclical and too prone to volatility. Those who are more inclined to take risks and look for medium term investments may consider signing up.
