Value Still Wins Out Over Growth – MoneyWeek

Ican’tseeit。

FormorethanafewparticularlysplendidcompaniestoshowmuchinthewayofearningsgrowthintheUKthereneedstobeareasonabledegreeofeconomicgrowthtohelpthemalong。

Butthereisn’t。

Housepricesandtransactionsarestillfallingandarelikelytocontinuedoingsoforsometime;ourmanufacturingindustryremainsinrecession;personalbankruptciesareata40-yearhigh;companyinsolvenciesarerisingfast;andsalesonthehighstreetaretheworsttheyhavebeenforadecade。

Lastmonth,saleswere1。

9%lowerthantheyhadbeenduringthesameperiodtheyearbefore,accordingtofiguresreleasedbytheBritishRetailConsortium(BRC)。

Nowondereconomicgrowth–whichcameinatamere0。

4%inthesecondquarter–isnearitsweakestfor12years。

Therecentcutininterestrates,takingthebaserateto4。

5%,isn’tgoingtomaketheslightestbitofdifferencetothisdismalsituation。

Thecutknockedagrandtotalofabout£20offthemonthlybillofsomeonewithamortgageof£100,000,hardlyenoughtomakethemthinktheymightpopoutandbuyanewfridgeandnowherenearenoughtomakeafirsttimebuyerdiveintothemarket,orhelpabuy-to-letinvestorbreakeven。

Thehousebuildersandtheretailersknowthis,ofcourse,whichiswhyeverytimetheyreportmoreoftheirmiserablenewstothepresstheyalsousetheopportunitytodemandmoreinterestratecuts。

Thereisn’tashopmanagerorhousebuildingCEOouttherewhodoesn’tsomehowappeartothinkthattheBankofEnglandismorallyobligedtocutinterestratestohelpthemoutoftheirdifficulties。

Butitisn’t。

UKinterestratepolicyisn’tdesignedtokeepMonsoonandMarksSpenceroutoftrouble,buttokeepinflationundercontrol,andtheBankofEnglandhasagreatdealmoreonitsmindthangivingKevinHawkins,thedirectorgeneraloftheBRC,whathewants。

Rawmaterialcostsroseattheirfastestannualratein20yearsinJuly,pushinginputpricesformanufacturersupbyanannualisedrateof13。

4%andoutputpricesupbyanannualisedrateof3%。

Thatmeansthatthereisseriousinflationinthesystemalready(somethingregularreaderswillknowI’vebeenworryingaboutforsometime);thatfactoriesarebeginningtopassitontotheircustomers;andthatasaresultMrHawkinsisveryunlikelytogetthebigroundofinterestratescutsheandhismembersthinkwillbailthemout,howevermuchtheywhine。

AllinallitseemsclearthatthereistroubleaheadfortheUKeconomy。

SowhybuyUKdependentgrowthstocksorindeedUKsmallercompanies?

Ifyoucanfindonethatreallycangrowwhennothingarounditisandwhichremainsreasonablypriced,fine,butIthinkyouwillfindthatthesearefewandfarbetween。

InsteadIwouldhavethoughtanyonedeterminedtoholdUK-listedequitieswouldbebetteroffavoidinganythinggearedtotheperformanceoftheUKeconomytoretail,tohousingandtoUKemploymentinparticular–andbuyingintolargeLondon-listedmulti-nationals。

ManyofthesharesintheFTSE100,forexample,areinternationaltosuchadegreethattheyaredrivenatleastasmuchbyconditionsinEuropeandtheUSasthoseintheUK。

What’smoretheyremainrelativelyreasonablyvalued(theaverageyieldisaround3。

5%),makelargepercentagesoftheirearningsinforeigncurrencies(goodnewsifinflationstartstoerodethevalueofthepound)andcanarrangetheiraffairssothatatleastpartsoftheirbusinessescanavoidtheregulations,redtapeandrisingtaxburdenthatsostiflesenterpriseintheUK。

I’dfavourtheminersandtheoilcompaniesstillbut,ifyouhavenoethicalobjectiontothem,thetobaccocompanieslookreasonablypricedtoo。

ByMerrynSomerset-Webb,editor-in-chief,MoneyWeeFirstpublishedinTheSundayTimes14/8/200

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