Short of Puff
Another sharp fall in inflation is very welcome news, particularly as figures on that front have so often been disappointing. Both main indices, the Consumer Prices Index and the Retail Prices Index, eased by 0.3% in September and the CPI at 2.2% is now only a fraction above its 2% target rate.
While inflation is not necessarily bad for equities, since they are the one form of investment that keeps pace with inflation plus a bit extra, it is far more encouraging to hope that the worst of the squeeze on disposable incomes is over.
The worst, perhaps, but incomes will still be squeezed further in the coming months. Inflation will edge higher over the rest of the year as increasing energy and food prices feed through. As we have noted many times before, energy costs reverberate through the economy, magnifying their impact.
However, I am reasonably hopeful that CPI, and possibly RPI, will peak no higher than the 3% ceiling that the Bank of England is supposed to keep intact with the judicious adjustment of interest rates (except that everyone has forgotten).
The fact that record numbers of people are in work will not encourage shops to raise prices. Many jobs are low paid or part time, so wages are not rising to fuel demand—currently they are up about 2% on last year. Moreover, some jobs were probably temporary, having been created by the Olympic Games.
It is, however, comforting that many people who are capable of working are determined to do so rather than sponge off the state. Part-time work is at record levels and a substantial proportion really wants a full time job. What is particularly encouraging is that youth unemployment, although still far too high, has fallen back again from soul-destroying levels.
In terms of keeping the economy going, the effect is somewhat muted. The pick-up will continue to be slow. Nevertheless, we are moving in the right direction and I expect the economy to be just in growth for the full year.
It is also pleasing to note that the Bank of England's Monetary Policy Committee has voted unanimously not to increase the limit on the latest round of quantitative easing. This policy may well have run its course as committee members seem to be moving away from it.
Quantitative easing has done nothing for the economy and will not do so for as long as it remains merely a sponge to soak up government debt. Putting it on hold indefinitely sends a signal that we are weathering the storm and the latest figures showing a fall in government borrowing in September, plus a downward revision for previous months of this financial year, emphasise the point.
The storm is by no means over, despite the assertion this week by French president Francois Hollande that the worst is past for the eurozone. His unduly optimistic remarks followed a fall in borrowing costs for Spain and Italy. Those of us with memories that go back further than a few days will recall that we have been here before, and before that, and before that...
There are hopeful signs further afield, for example in the US, where economic figures remain reasonable if not exciting, and in China, where growth continues at a more sustainable rate.
The FTSE 100 index has pushed back above 5,900 points, which in my view is quite far enough for now. Any further investments need to be selected with care. I am looking to reinvest dividends I have received since April and I also have the last part of my ISA allowance for the year available.
Two of my investments are showing a loss—Hornby (HRN) and Severfield-Rowen (SFR)—and I do not intend to throw good money after bad. Mercifully they are the two smallest holdings I have and the reason why I have not built on my original investment is because of their poor performance.
On the other hand, the companies where I built stakes aggressively—Sainsbury (SBRY), Vodafone (VOD), Balfour Beatty (BBY), GlaxoSmithKline (GSK) and United Utilities (UU.)—all look fully valued. I shall therefore concentrate this weekend on finding a new stock with gorwth potential and a solid dividend. They still exist. Click here to hear more from Rodney on his favourite dividend stocks.
Be Careful What You Wish For
BP's (BP.) tortuous travails in Russia seem to be entering a new phase which will see the winding up of the disastrous struggle for control of the TNK-BP joint venture. Relief that BP will get a cash windfall plus an enlarged stake in state oil giant Rosneft have prompted a surge in the share price.
It is worth remembering that TNK-BP was once a happy ship until relations between BP and the Russian oligarchs who are its partners turned sour. Doing business in the Russia of president Vladimir Putin is a complex affair and you never know who will be in or out of favour, as BP's existing partners have found.
There is some advantage in being part of the state controlled enterprise and it will do no harm for BP to live more quietly with a minority stake rather than the 50% it held in TNK-BP. However, BP's voice will be drowned out if push comes to shove, and there is plenty of pushing and shoving in Eastern Europe.
The rise in BP's share price this week is a better opportunity to get out and find a more stable investment elsewhere.
See You Next Friday
I hope any readers who attend the London Investor Show at Olympia next Friday, 26 October, will take the opportunity to come up and talk to me as several of you did last year. As well as taking my traditional slot as first speaker of the day I am doing an extra session on impending changes to rules governing the payment of independent financial advisers.
To receive your Morningstar discount tickets, visit www.londoninvestorshow.com and use voucher code ‘Morningstar’.
Market Performance (October 15-19)
FTSE 100: +1.77%
FTSE 250: +1.99%
FTSE All Share: +1.79%
FTSE SmallCap: +0.98% -
FTSE AIM 100: +1.44%
FTSE Fledgling: +0.95%
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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.
