SUMMARY The global economy has developed a sinking feeling in recent weeks, right on cue for the Titanic anniversary. But there will be outstanding opportunities for those that are patient.
The 100th anniversary of the launch of the Titanic somehow seemed appropriate in recent weeks, as the economic numbers engendered a sinking feeling.
We first spotted the iceberg back in March, suggesting that unfolding events (higher commodity prices, austerity measures) were deflationary, that we should expect consumer spending to fall, along with bond yields as an acknowledgement of a renewed slowdown. While very much a minority view at the time (as headlines ranted about inflation), for us it passed the “bleeding obvious” test.
In the last few days the Office of National Statistics confirmed our suspicions that consumer spending contracted in the first quarter of 2011 (down by 0.6%). The UK economy has experienced the slowest pick-up in consumer spending of any post-recession period since 1830 (says the FT). The UK economy has flat lined, and the deficit reduction policy isn’t reducing the deficit. Until recently UK manufacturing was improving, but it now represents just 12% of UP output (it was 32% in 1970), so the overall impact is muted.
As we expected, this has caused UK gilt yields to fall. But this is by no means a UK phenomenon.“US economic data is falling off a cliff” proclaimed one of the more sober analysts. US house prices have fallen 5% over the last year, and the cumulative fall since their peak is now greater than during the Great Depression. US manufacturing activity has fallen the most in a quarter since 1984, and if you lift the bonnet on the recent (poor) employment numbers, they are even more disturbing. Australia just reported the biggest GDP drop in 20 years – understandable following flooding and cyclones, but their consumers and housing market were already exposed.
It isn’t all bad news. As economies slow, commodity prices and inflation will fall (though food prices do remain the great unknown). UK shares are not expensive, and this should limit the downside, or at least prompt a faster bounce than if the market was currently on a heady PE ratio. If the FTSE 100 index (5800 now) falls to support around 4800 there will be some marvellous opportunities, for growth and income investors alike. Those of you that have been patient just need the stock market to reflect the clear message from falling bond yields.
