The UK – An impaired lending capacity – What’s the outlook for investment opportunities?

“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain” (Mark Twain)

Back from a business trip to South Africa. I was flown over to present my investment ideas and during my time being the key note speaker and from the conversations with investors, I noted a recurring question – “what data should I watch?”. Now I always maintain one must not focus too heavily on one data point or information from one source / point of view. Nevertheless, to help give some clarity, I’ve managed to boil down global economic insights into just a handful of key points. Starting with the UK… Short term growth restrained, drivers of growth later on uncertain…

In terms of the three stages required for a self-sustaining recovery…

1. Stimulus – yes, we’ve seen quantitative easing but are we seeing LENDING (to businesses, consumers etc – remember consumption still accounts for a large % of GDP)?

2. Inventory Rebuilding – yes we’ve seen temporary re-stocking but are we seeing consumers SPENDING?

3. Job Creation – are jobs no longer at risk i.e. a SELF-SUSTAINING recovery?

Conclusion: The UK “aint there yet!”

1. Versus stimulus we are to see – THE LARGEST FISCAL SQUEEZE SINCE WW2…

Planned fiscal tightening (2010-13). From adding 0.8% to GDP to subtracting 0.2%

And lending remains muted:

“Despite various forms of support from the Bank of England and from Government, it is clear that the lending capacity of the banking system, in the UK and elsewhere, is impaired and will take some years yet to recover. Some banks need to continue de-risking and de-leveraging.” Paul Fisher – Executive Director Markets and member of the Monetary Policy Committee

Source: Bloomberg. UK Money Supply Growth (yoy) at 3 decade low


2. Instead of spending, governments, households and companies are DE-LEVERAGING, CONFIDENCE IS LOW, household spending restrained

In Rebecca Wilder’s article in her blog Household leverage: what does the US have that the UK does not? in News N Economics (her answer: they still have expansionary fiscal policy) the chart featured below highlights the extent to which households still need to de-lever (and a comparison of the heightened problem in the UK vs. the US)

UK Household leverage (blue) - further to fall, especially when compared to the US (red)

3. Job creation? Following on from the government’s public spending review – 750k public sector jobs are at risk

INVESTMENT INSIGHT – Conditions for a sustainable, strong recovery are “still not there yet”

Returns are to be generated opportunistically – in a lower growth environment, index moves may be range bound – capture alpha from the volatility – quality stocks that are over-punished during pullbacks. Instead of investing in companies focusing on UK sales, invest in those more internationally focused (especially EM).

Stock example – RR/ LN: Rolls Royce Group PLC (more on the car manufacturer next), the global power systems company, “signs agreement with STX Engine Company to further strengthen position in Asia” October 2010 (Rolls Royce Announcement)

“STX Engine, based in Korea, will become a packager of Rolls-Royce industrial gas turbine generating sets in the Asia Pacific region to better serve the growing demand for electrical power generation technology and will further strengthen our position in important Asian markets such as Bangladesh, Philippines, Taiwan, Vietnam and also Korea”.


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