No sign of recovery for UK equities yet, says F&C’s Stanley

In response to increasingly negative headlines on the UK economy, Catherine Stanley, manager of the F&C UK Dynamic Fund, believes there will be no respite just yet.

“The downturn began with the credit crunch, but is now led by the consumer. The UK is more property focused than many other developed world countries and any negativity in this sector naturally impacts on the wider economy. In particular, consumer spending power has been enhanced in recent years by re-mortgaging and equity release schemes; these practices were unsustainable long term and will not be widely available again for some time”.

Stanley believes that this week’s government proposals to stabilise the property market will have little effect. “It shows no sign of improving and, whilst some of government responses will benefit individual cases, it is unlikely any difference to the housing market as a whole will be achievable”.

She continues “Much has been made of the purported squeeze on the consumer’s purse but in reality the real pressure has only just begun – food prices look set to rise further and the big energy bills will not be evident for several months yet. Although headline consumer spending data has not been fantastic, we anticipate these numbers will deteriorate further and there is no doubt that economic figures will worsen”.

The latest OECD figures support the belief that a technical recession is likely and, although unemployment is still relatively low, it is likely to increase and “for most people it will feel like a recession” says Stanley. “Although never welcome, it is natural for economies to experience periods of correction after a phase of strong growth”.

Stanley concedes the fall of Sterling is undoubtedly more bad news for consumers but not necessarily negative for all. “As companies are more geographically diverse, currency movements may not necessarily be a bad thing. Although the slide of sterling against the dollar undoubtedly impacts retailers who purchase in this currency, the flipside is that it may help industrial companies selling overseas where currency has been a negative for the last few years.”

The weak stock market has anticipated these conditions for some time but recently there has been a slow shift towards value and cyclical recovery plays. “Investors are still reticent to buy defensive stocks as these seem expensive and there have been bounces in house builders and some of the cyclical sectors. However, this has been a slow shift and there is no sign yet that the market is ready to turn”.