No ‘Appalling’ Labour-SNP Coalition – But Where Next For Investors?
The markets greeted David Cameron’s unexpected victory in the General Election with great enthusiasm. The prospect of an SNP/Labour coalition, which would have been likely if England hadn’t turned blue, was an appalling thought for the City. Now we are faced with another dose of austerity and George Osborne will do well to meet the growth forecasts for the UK whilst this is being implemented.
Economic data for the UK over the last few months has sent mixed messages. After achieving a growth in GDP of 0.6 per cent in the fourth quarter of 2014, the economy only grew by 0.3 per cent in the first quarter of 2015. This was partly due to the strength of sterling, which made life difficult for exporters, and it was Aldo due to an exceptionally weak performance from the construction sector. Unlike the US, we did not have a hard winter and so this weakness has largely been attributed to large construction projects being delayed ahead of the election.
A recovery is now expected, led by house building as the housing market has taken particular cheer from the election result. The housing sector was strong ahead of the election with house prices rising by 1.4 per cent in the three months to the end of April. Immigration figures published yesterday showed that there was a net inflow to the UK of 318,000, which partially explains the continued high demand for new housing.
The UK saw inflation fall below zero for the first time since 1960 in April. Prices declined by 0.1 per cent. Lower prices and a real increase in wages encouraged consumers to spend and retail sales grew by 4.7 per cent in April. Sales of household goods rose by 11.9 per cent on an annualised basis and sales of clothes and shoes rose by 8.7 per cent, helped by warm weather during April. Wages grew by 1.9 per cent, which represents real growth of 2 per cent.
Against stock outlook a portfolio of loans yielding nearly 9 per cent gross looks attractive
This level of real growth in wages has not been seen since before the financial crisis. Deflation is not expected to continue for long as petrol prices are rebounding. However, a big hick in inflation is unlikely as sterling remains strong, reducing the price of imports.
In the current environment, interest rates are likely to remain static. This remains a major concern for older people and savers generally. Stock markets have had a strong start to the year driven by quantitative easing in Japan and Europe. On fundamentals, shares look expensive. Bonds and property also look expensive. Against this background, a portfolio of Money&Co. loans with a gross yield of just under 9 per cent looks attractive.
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