Economic tea leaves tell Brown to go for early poll

Will he or won't he? With Labour riding well ahead of the Conservatives in opinion-polls, speculation is mounting as to whether the Prime Minister, Gordon Brown, will be tempted to call a snap Autumn election or whether his reputation as a "cautious son of the manse" will persuade him to wait until next year.

According to leading investor Ted Scott, manager of the top performing F&C UK Growth & Income Fund, if Mr. Brown takes note of the "economic tea leaves" the case for going to the country now is overwhelming.

"Despite the recent turbulence in markets, the crisis at Northern Rock and public sector pay disputes, none of this appears to have seriously stuck on the Government's reputation for economic management," said Scott.

"Yet dark clouds are gathering on the economic horizon and it is clear that the impact of the liquidity crunch is already starting to spill over into the real economy. House prices had already start to cool as previous rate rises bite and while the chance of further increases has now all but disappeared, with the next rate move more likely to be downwards, the liquidity crunch means that tougher lending conditions will now prevail."

Scott points to a round of re-mortgaging this November when two-year fixed rate deals offered when interest rates were at a trough expire as a significant trigger point for consumer woes. "People who borrowed heavily when rates were much lower can expect to see significant uplifts in their monthly mortgage payments. This will surely mean that consumer spending will be hit and that has a major impact on the UK because consumption accounts for 70% of GDP," explained Scott. "While a recession is not the most likely outcome, 2008 is undoubtedly going to be a tougher year for the economy. From an investment perspective that means I am positioning the F&C UK Growth & Income Fund in defensive companies with strong free-cash flow and generally avoiding businesses heavily exposed to the consumer. From Mr. Brown's perspective, if he hesitates until next year, he may find he has missed his best opportunity to secure a return to office with a commanding parliamentary majority."

Examples of companies that Scott favours in the F&C UK Growth & Income Fund, which is enjoying its best year ever at the top of the equity income sector, include Rolls Royce, SSE and BT.