UK Offshore Fund Managers

Goldilocks Gordon – that’s UK chancellor Gordon Brown to you and me – has signalled to the Bank of England that he does not disapprove of further interest rate rises. However, he has warned about pay pressures in the economy.

Brown – you may remember from last month that the Goldilocks nickname relates to the strength of the economy: neither too hot nor too cold but just right, like in the fairytale – was speaking to a City audience on 19 October when he praised the Bank of England for its forward-looking approach to interest rates. He promised to back any tough decisions on rates which the bank may feel obliged to make in the future.

Quoted in the following day’s Daily Telegraph , Brown warned opponents of timely rises in interest rates that an alternative strategy risked a return to the “boom and bust of the past”. Such words will be of comfort to those fund managers and analysts who believe Brown and the Bank of England are making all the right moves and that a continuation of the current economic strategy should see the UK market prosper over the next few years in the way the US market – in reference to which the Goldilocks term was first used – has prospered for the last few.

UK Offshore Fund Managers - Monetary Policy Committee

However, he may not be quite so popular with industrialists and trade unionists who reacted negatively to September’s decision by the Bank of England’s Monetary Policy Committee to raise interest rates by a quarter of a point to 5.25 per cent.

Brown warned in his speech that there is still a long way to go to build a culture of low inflation in the UK and warned against earnings rising. And this warning was issue despite the fact that on 12 October, figures released by the government showed that inflation was down at levels last seen 36 years ago and that underlying inflation had fallen well below the target level of 2.5 per cent set by the government.

“The worst of short-termism would be to pay ourselves more today at the cost of higher interest rates tomorrow, few jobs the next year and lower living standards in the years to come,” he said.

UK Offshore Fund Managers & Lloyds TSB

Certainly as far as fund managers are concerned, the UK is looking good. Lloyds TSB, writing in its Economic Bulletin for the month of October, comments that: “Recovery in the UK economy is now firmly underway. The slowdown has turned around in just two quarters – GDP grew 0.6 per cent in Q2, compared with 0.2 per cent in Q1 and zero in Q4 1998.

“Preliminary data for Q3 suggests that the pace of GDP growth accelerated further and will be close to 0.8 per cent, or more than three per cent in annualised terms.”

Lloyds TSB also points to the fact that retail sales grew by 1.3 per cent in the three months to August alone, whilst manufacturing production was up by 0.9 per cent in the same period.”

UK Offshore Fund Managers - Turning To The US

Turning to the US, as expected the Federal Reserve left interest rates unchanged at the beginning of October but suggested that we could see a hike in the none-too-distant future – possibly even at its November meeting.
The Federal Open Market Committee said increased productivity had fostered favourable trends in unit costs and prices that appear to have been sustained.

But it warned demand is still growing faster than supply and that there is a decreasing pool of workers available to take the jobs.
The Fed said the committee needs to be alert to “the potential for costs to increase significantly in excess of productivity in a manner that could contribute to inflation pressures and undermine the impressive performance of the economy”. Between-the-line readers took this to be a warning on rates and the Dow Jones took fright, before recovering and finishing virtually unchanged on the day.

UK Offshore Fund Managers - Dow Jones

But a few days later on 12 October, the Dow Jones Industrial Average – the US stockmarket benchmark – suffered its biggest one-day points fall since May, again on interest rate hike fears. The Dow slid by 231.12 points to close at 10,417.06. Quite a few fund management groups seem to be expecting further rates rises. For example, HSBC, writing in its Investment Update, says: “With the continued strength of the economy, future interest rate hikes cannot be ruled out, although revisions to corporate earnings growth numbers have been positive.” However, Perpetual, according to the most recent issue of its Offshore Investment Report, is a little bit more optimistic.

“Economic data continues to point to a very strong economy with a benign inflation outlook,” it writes. “The cyclical and industrial side of the economy continues to improve with pricing power becoming more evident, particularly in the energy and industrial commodity sectors, as prices rebound from the overly depressed levels following the Asian crisis.” Perpetual suggests the value in the market is in the financial and commodity sectors, which have been poor performers recently.

UK Offshore Fund Managers - The Investment Environment

“The investment environment remains challenging. If the market believes interest rates have peaked, there is every chance that the market will move towards value stocks as was seen in April,” it says. Elsewhere, Japan is still finding favour with fund managers. Perpetual suggests that economic growth prospects continue to improve, with first quarter GDP growth at 2 per cent and 0.2 per cent for the second quarter.

“Although there has been minimal movement in the stock and bond markets, the month has been dominated by news,” it writes. “For example, the announcement of a three-way banking merger between the Industrial Bank of Japan, Dai-Ichi Kangyo and Fuji Bank. The sheer size of this merger, and the likelihood that it will provoke further consolidation in the corporate sector is positive both for the economy and the stockmarket.”

UK Offshore Fund Managers & The Group

The group believes that the market looks fundamentally attractive and suggests there is a possibility it will move ahead over the short term “driven by increased corporate activity and Japanese institutions at last becoming buyers”. Turning to Europe, it seems that Pictet, writing in its publication, has mixed feelings. It suggests the uptrend may extend for longer than expected. “Cyclicals’ outperformance earlier in the year was such that the laggardly sectors were always going to enjoy a catch-up phase at some point,” it says. “Retailing, pharmaceuticals and banking stocks, in particular, look to be trading at very attractive valuation levels at present.”

Pictet does have some reservations, though, about whether the market will soar in the second half of the year as the potential for bond yields to fall is limited and the dollar is likely to be robust as growth in Europe gathers impetus. As we went to press there was some speculation that the European Central Bank was about to put up interest rates.

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