Groundhog day?

Today is ‘Groundhog Day’, a traditional festival celebrated in the US Canada immortalized by Bill Murray in the film of the same name, in which he relives the same day again and again. John Kelly, Head of Client Investment at Abbey wonders if we are reliving some of the economic conditions of 1990.

Says Kelly: “At first glance, there are many similarities between today and the turn of the 1990s. Similar stock market returns, sustained house price growth and strong City and Financial performance are common to both periods. Equally, the political environment, with the impending exit of a long serving prime minister is remarkably similar. It is understandable if people are wary that, given the similarities, we could face a downward house price movement similar to that seen in the early 1990s.

“However, before the doomsayers get excited, there are many differences. 1990 started with RPIX inflation running at 7.7%, while 2007 started with RPIX inflation at 4.4%. Moreover, in the early 1990s inflation spiraled as a result of demand outstripping output, creating the classic boom-bust inflationary cycle. UK interest rates were a punishing 15% and US rates stood at 8.25%, against 5.25% in both areas today.

“Recent inflation has been linked to rising commodity prices around Chinese demand, and supply concerns around oil. Already we are seeing easing of oil prices from 2006, with current Brent Crude prices at $57 a barrel, down from a peak of $78.

“We must not be slaves to the past. Apparent similarities of today with a prior period can be amusing but are not the way to set investment policy. Customers must look forward and consider their objectives for the future. Some things however do hold true across the years: diversification, sensible asset allocation and a focus on top quality fund managers.”