We now have a world where record oil prices and dollar weakness combine to suggest that the result might be recessionary pressures on the United States. Reducing liquidity will also have some recessionary impact despite the unprecedented injections from worldwide central banks. The US may be able to avoid recession if interest rates are cut quickly in 2008 and if export growth and business investment replace any reductions in consumer spending.
The UK is in many ways similar to the US with falling house prices, declining retail sales and slowing GDP growth rates. Again, it is likely that interest rate reductions will alleviate this situation but this needs to happen quickly in 2008 to avoid a housing and consumer-driven slowdown.
In Europe, interest rates are likely to rise to combat increasing inflation but the outlook is positive subject to some hotspots.
China, India and much of Asia are expected to continue to grow but UK investors need to be cautious in these markets as the slowdown in spending by consumers will affect these areas substantially. The additional political risks of investing in these areas has not been fully evidenced for some time and China may be particularly susceptible to these. Japan looks set to continue it’s “dog” status in investment terms (i.e. there is no significant good news).
Long-term investors should not be concerned with the current situation. Experience has shown that investors who hold firm and persevere will be rewarded if they take a longer-term view. Selective adjustments to portfolios remain sensible in this climate and, where portfolios have benefited from strong gains in the following sectors, profit-taking may be a sensible strategy.
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UK Commercial Property (care needs to be taken with liquidity in these funds and pricing adjustments as both suggest that there may also be long term value here for investors)
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UK Small and Mid-cap stocks
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Emerging Markets (particularly those with stellar recent gains in particular China)
Investors should not “run to the hills” as there are buying opportunities in many markets and UK Large and Mega Cap stocks remain fair value. To reduce short-term volatility risk, the following are worthy of consideration:
- Cautious-Managed and Distribution funds
- Corporate Bonds (which should deliver positive returns if interest rates continue to fall)
- Structured Products (incorporating capital guarantees) in sectors including equities and commodities
- UK Equity Growth and Income funds
As always, quality investment advice will be key in 2008.
Peter Heckingbottom FCIB, ASFA, Chartered Financial Planner,
Investment Director and Deputy Managing Director