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How do current economic prospects and scenarios influence our investment advice?

Global Developments

Recent Developments
We have just passed through a period of time that has highlighted for us the fragile interactions that connect global businesses and the major trading blocks of the world and which drive growth.

We have enjoyed some 16 years as a global economy of unparalleled economic growth.  This has been driven by an explosion of international trade, the cost reduction effects of emerging economies such as China and India and a more disciplined approach to economic management by Governments.  The boom and bust roller coaster rides that have typified economic progress since the 50’s are now a thing of the past.  Or if not a thing of the past, then economic activity has been transformed over the last decade and a half.  So, although there have been major winners and losers in the last decade, and some countries, industries and sectors have had both boom years and recessions, the overall picture is one of continued, sustainable and robust growth.  We have even had to invent a new word for recession.  We now talk of ‘growth recessions’ and ‘soft landings’ where once we spoke of economic collapse and crises.

On balance most commentators remain positive about the near and medium term prospects for the global economy and its key trading regions.  Business investment remains strong, employment levels in the major economies are positive, consumer confidence is firm and corporate earnings are encouraging.  What is also different at this time is that governments, while keenly aware of the need to leave markets to manage their own solutions, are willing to intervene in appropriate ways to support the market process.  As the months unfold, these factors are some of the key drivers of stability that we should monitor in judging how the global economy will ride out the current storms as they indicate how business and therefore countries are handling the uncertainty and challenges of the moment: whether they are heading for safe harbours, turning to head into the wind or letting down the life boats.

There is an increased level of risk in the system, which has caused the shared view to be for a slowdown in the next year to 18 months.  The IMF, for example has continued to forecast global growth of 5.2% in 2007 but has revised its forecasts for 2008 down to 4.8% compared to it’s expectation of 5.2% published in July.

The shifting forces in the global economy clearly represent a degree of risk and uncertainty.  It is this against background that we decide how that scenario impacts on investment decisions.  In doing this we are well advised to avoid the screaming rhetoric of media headlines and assess what opportunities are presented in this time of change that will enhance our ability to give advice that is ‘serious, mature and business like’.

Dr Dominic Swords
October 2007

Overview of Economic Prospects

USA

Trends and risk factors:

• The latest turmoil in financial markets has led the US Federal Reserve Bank  and other forecasters such as the OECD, IMF and World Bank to expect a slowing down of the economy in the 4th quarter of the year with a mild rebound into 2008
• Rumours of a technical recession are genuinely over-stated
• Consumer growth, corporate earnings, employment and export levels are all strong as reported by The Fed’s Ben Bernanke on 16 October although some companies have more recently announced lower than expected earnings.  The Caterpillar announcement last week created some jitters in the markets of more to come, but this has not materialsised
• Business surveys such as the Institute for Supply Chain Managers reflects strong and positive sentiment with expectations of a slowdown this year before a reasonably good rebound in 2008
• The Christmas trading period will provide a good insight into the mood of the market
• Nervertheless, there are concerns over the weak housing market and credit markets.  We should watch for progress in financial markets solving the under pricing of risk through initiatives as the recently announced super fund launched this week by some large US investment banks
• One of the largest sources of risk is that companies and individuals will over-react to the current fundamentals and take actions that precipitate their fears.  Watch for actions by companies, investment houses and the authorities that are designed to quell these fears and stimulate positive sentiment.
• Growth forecasts (Real GDP):  2007: 2.2 % 2008:  2.4 %
  

Overview of Economic Prospects

UK

Trends and risk factors:

• There are many positive features of the UK position making it well placed to take advantage of current growth trends internationally.  We are the foremost global capital market and are well positioned in our relationships with growth economies in the Far East – especially India and China
• The UK has some strong fundamentals in terms of continued employment growth and corporate health
• A positive record and attitude towards business change, labour market flexibility and innovation all create a healthy climate for robust growth
• Risks are present in the form of the housing market – will it see a widespread decline in prices or a period of minor growth as the rest of the economic fundamentals catch up with what is clearly over-valued residential property prices?
• Risks also present themselves in credit markets due to both the international nature of our markets, which lead us to be exposed to the risk of financial contagion, and the relationship between house price inflation and consumer spending via the vehicle of a massively buoyant re-mortgage market.  Watch for developments here that could turn a minor degree of exposure to a more serious brake on growth.
• The pre-Christmas retail trading period will be a good indicator of consumer confidence.
• Government funding is also under pressure.  It will not be the significant source of economic growth that it has been in the last 8 years in particular.
• Growth forecasts:  2007: 2.9 % 2008:  2.1 %  
• Interest Rates: 2007: 5.8%, 2008: 5.3%
• Inflation Rate: 2007: 2.0% (CPI), 3.8% (RPI), 2008: 2.0% (CPI), 2.6% (RPI)
  

Overview of Economic Prospects

China, India and Japan

Trends and risk factors:

• Japan has now re-emerged as a growth economy within the Pacific region following a decade of decline.  Corporate and financial re-structuring have now laid the way for renewed export lead expansion.  Note, this may act as an obstacle on what had been seen as a clear playing field for China to become the new dominant force in that part of the world.
• China is the well recognised high growth player in the East and with the potential to wrench economic dominance and influence from the USA in the coming decade.  Its record of expansion is formidable with continued double digit growth expected and realistic over the next 3 to 5 years.
• Some concerns expressed within China over its potential to over heat as it seeks to maintain its momentum through infrastructure spending and the integration of the population outside of the Eastern seaboard more effectively into its development
• It is also worth noting that Chinese lending to the US and its large export surplus with that economy makes it at least as interested as the US in avoiding a major crisis and crash in the West  

• India is a buoyant and modern economy with a population growth rate that will see it outstrip China in the next 10 to 15 years.
• The experience of many companies, however, is that they await the emergence of a high growth and modern market into which they can market their products. 
• Note their dominance in the Steel industry globally – a position once shared by the US and UK – and their growth in the auto industry.
• Growth forecasts:  2007: China, 11.2%, India, 8.9%, Japan, 2.0%
• 2008: China, 10.0%, India, 8.4%, Japan, 1.7%

References

More information on global forecasts and reviews can be found at:

bcg.com – the home page of the Boston Consulting Group who publish regular features and comments on industry trends under their ‘Perspectives’ titles

oecd.org – the website of the Organisation for  Economic Cooperation and Development who produce an ‘Economic Outlook’ twice a year in May and October

hm-treasury.gov.uk/forecasts – who produce monthly summaries of forecasts by banks, the treasury and independents.  This is the source of what people refer to as the ‘consensus forecast’

deloitte.com – who produce regular updates on markets and economic prospects.  Thei 2007 outlook is attached. 

imf.org – the home page for the International Monetary fund.  They produce regular economic reviews with a particular perspective on financial issues

We are pleased to announce that we now have an office open overlooking the new Wembley Stadium where we will be happy to provide our clients with the full range of financial services.


The address is:

10th Floor
York House
Empire Way
Wembley
Middlesex
HA9 0PA

Phone: 0208 902 1482

I hope you’re enjoying some pre-summer sunshine and that your critical illness cover is up to date.

Perhaps not the most agreeable way to start this month’s update! Nevertheless, a topical subject for you, as critical illness cover has received some negative publicity recently. Several policyholders’ claims have been rejected, but if you’re diagnosed with cancer, you need to know yours will pay out. What can you do to bullet proof your policy, as well as your financial security?

At Ascot Lloyd we ensure our clients recognise the significance of full medical disclosure. The ABI (Association of British Insurers) give clear critical illness ‘definitions’ to which all providers must adhere – it’s mandatory. This ‘black and white’ approach makes it fair for everyone.

Some providers go above and beyond the ABI code, offering even more comprehensive protection. The cheapest policy does not always offer the most peace of mind. My clients know the difference, hence their willingness to refer me to their friends, family and work colleagues for an unbiased recommendation.

People pay good money to insure against, for example, a broken freezer, wine-stained carpet or a chipped car windscreen. Although irritating, these events are not life changing, nor likely. Especially when you consider:

• 1 in 3 of us will be diagnosed with cancer before age 75 *
• 1 in 10 males aged 30 will suffer a heart attack before age 65 **
• 1 in 8 females aged 30 will contract cancer by age 65 **

Could you pay for your mortgage, bills and food on £81.35 per week?*** This is your state benefit. Should you be one of the 1 in 3, would you rather lose your house or your mortgage?

Phone me, or my colleague Johnathon, today on 0845 345 5111 for more information. Having assessed your circumstances, we’ll be delighted to make an independent recommendation for your protection needs. Have a healthy and happy month – see you in June.

* Office for National Statistics, 2002
** GE Frankona Re estimate, 2002
*** Incapacity benefit (long term rate), 2007

Happy Easter to one and all and I hope the year is shaping up nicely for you. Now the clocks have gone forward we can start looking forward to our well-deserved holidays, summery evenings and ripe strawberries and cream!

Meanwhile, the tax year-end is a very busy and interesting time for us and our clients. My client Colin is needing to maximise his tax-free savings entitlement by making good use of his ISA allowance. Not before time, in my view, has the Chancellor seen fit to increase this. His recent budget announcement gives us all a further allowance of £200 per year, although regrettably not available until the 2008/09 tax-year.

Bigger changes are afoot in the financial protection arena, particular with regard to illness insurance. Many people are familiar with Critical Illness Cover (CIC), which is designed to pay out a lump sum following diagnosis of one of a number of serious illnesses or medical conditions.

However, improvements in medical care and research are moving the goalposts and affecting payouts. CIC is evolving, and not to everybody's liking. Illnesses such as early-stage breast and prostate cancer are considered much more treatable than a decade ago and are now excluded from many CIC policies. As medical science progresses, more such exclusions are likely, leading to more confusion.

I recommended Mark, a client of mine, a new type of cover which is 'severity-based'. This type of insurance covers a wider variety of medical conditions than with CIC, and the payout can vary, depending on how serious the condition is. This policy could potentially pay several lump sums, should Mark experience either more than one illness, or an original illness become more severe.

This type of insurance was introduced in South Africa several years ago, and has proved very popular out there. A couple of the UK's more forward-thinking insurers have now made severity-based cover available in the UK. It won't be suitable for everyone, and CIC still has its place. Don't forget that Income Protection, in combination with CIC, forms the foundation of a sensible financial plan for most people.

You can be sure that at Ascot Lloyd we keep a close eye on new developments such as severity-based cover and will always tailor a solution to your individual needs. Please accept my best Springtime wishes on behalf of us all at Ascot Lloyd, and do look out for my next blog entry, coming soon.....