Growing Like Topsy
The UK economy continues to grow. So does the national debt. That situation will continue throughout the eight month general election campaign. It means that shares will continue to pay dividends and banks will continue to pay a pittance on savings accounts. I am staying fully invested in shares.
The GDP growth figure for the second quarter of 2014 has been revised upward by 0.1%, a modest improvement but better than a reduction. That was the strongest quarter since the same three months of 2010, when the country was still gripped by recession and financial crisis. The current growth will last much longer than the false dawn of four years ago.
However, so too will the budget deficit, which Chancellor George Osborne has singularly failed to shift, mainly because he refuses to tackle seriously the tax dodging by companies who make profits here and contrive to book them in other countries.
He talks of reducing government spending but it continues to rise. Now Prime Minister David Cameron is promising income tax cuts that may prove to be an aspiration rather than a pledge, as the raising of the inheritance tax threshold was at the last general election. It will happen when finances allow, which at the present rate of progress will not be before the 2019 general election.
The main reason to feel optimism over the UK economy is that business investment is at last taking off. This is far more important long term than the increase in consumer spending that defies the squeeze on family incomes of the past six years.
The decline in share prices over the past month has been overdone. This is a chance for those with spare cash or an unused ISA allowance to invest. The FTSE 100 index will top 7,000 points in the next three months, in my view.
Balfour Beaten
One of the most astonishing admissions I have ever seen from the chairman of a listed company emanated from Steve Marshall as infrastructure firm Balfour Beatty (BBY) issued its fifth profit warning in two years. He told a conference call for analysts: “The company has had a series of surprises and it has been surprised itself.”
Given that the profit warnings have all been about shortfalls in the UK construction operations, where tenders for projects were at unrealistically low prices in a desperate attempt to work through the recession, you might have hoped that the chairman would have got a grip on this a bit sooner. How can he possibly be taken by surprise at this late stage?
This is not the greatest act of incompetence by a company chairman – RBS (RBS) and Lloyds (LLOY) suffered from a far greater dereliction of duty to shareholders but in those cases the bosses who presided over disaster refused to own up. Perhaps we should admire Marshall’s honesty in admitting his abject failure.
Marshall will step down as soon as he finds a new chief executive and chairman. It can’t come soon enough for shareholders like myself. This is a salutary lesson in how profit warnings rarely come in ones and twos. There will be a further shock to come as the new boss throws in the kitchen sink.
This is potentially still a great company and it is probably too late to get out after the latest share price fall. However, new investors should probably let the dust settle before attempting to buy on the cheap.
What Next?
Next (NXT) shares fell heavily when the retailer said sales had slowed in September because of the warm weather. This more than offset the increase in sales in August when the weather was cooler. Let’s get this in perspective.
Firstly, Next is still doing well. Secondly, Next was heavily overpriced, with a high price/earnings ratio and a poor yield. I have looked at investing several times but did not feel the rating was justified. Thirdly, with a share price above £60, any share price movement is exaggerated. The 410p drop over three days was the equivalent of a 4.1p fall on a share price of 600p, which doesn’t sound so bad.
At the current level, Next has a P/E ratio of just under 18x and a yield of 1.7%. Not compelling, but now worth considering.
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.
