UK Economy Shines While Europe Struggles

THE WEEK: Italy has provided a reminder of how difficult life in the Eurozone is by recording its second quarter of contraction - but this is not a new recession

Rodney Hobson 8 August, 2014 | 4:33PM

No economy is an island but there is a curious split in the economic view from the UK: more good figures at home and more worrying news from abroad. The bad news has outweighed the good in terms of stock market sentiment.

At home, the Purchasing Managers’ Indices continue to herald an economy in full flow. First construction, which has been a patchy sector, bounced back to life, thanks mainly but not exclusively to a surge in housebuilding. Then the PMI data showed services, the largest part of the economy, leaping even further than the optimistic expectations of economists.

These indices, virtually unheard of 10 years ago, have rightly come to be regarded as the most reliable forward economic indicator, far more meaningful than business and consumer confidence surveys. These July readings suggest that we shall enjoy a third quarter of strong growth.  

Industrial production is less encouraging but the sector is at least still growing and vehicle production is particularly strong.

We should bear in mind how much worse things could have been for the UK.

Italy has provided a timely reminder of how difficult life in the Eurozone is by recording its second consecutive quarter of contraction - but remember this is not a new recession. Italy has been in recession for six years and its economy has not got suddenly worse. We should not panic over the latest figures showing a very mild setback over the first half of this year.

It is also worrying that there is no end to the strife in Gaza. With so little to lose, Hamas is content to sacrifice Palestinians by lobbing rockets into Israel and provoking the inevitable heavy-handed retaliation. It is impossible to see how either side can back off. This is, however, a humanitarian rather than an economic disaster.

The biggest worry for investors is the escalation of the stand-off between the West and Russian President Vladimir Putin. It’s hard to know who will suffer most, Russia or the West. Probably Russia, but Putin’s trade deal with Iran will ease some of the pain. The US has delayed too long in getting Iran on side and has pushed it into Russian hands, just as it did with Cuba more than 70 years ago.

The problem with stock market forecasting is you never know quite what is lurking round the corner. I am now holding off making my last ISA investment for 2014/15 but I shall be looking to nip in smartly when the market bottoms. We are now below 6,600 points and the best opportunity could be next week. Darkest the hour before the dawn.

Bad News is in the Price

The bad news for supermarkets is in the price wars that drive down profits and there is no doubt that this sector is due for more pain. Morrison (MRW) will continue to suffer most and I will not touch Tesco (TSCO) until events prove conclusively that it has turned the corner.

My Sainsbury (SBRY) stake is now showing a tiny loss, although I am way ahead if you add in the dividends I have received over the past four years. It is important to consider total gains when assessing the performance of your investments, not just stock market movements.

Sainsbury is one of my largest holdings so I don’t want to invest more but I do feel it is worth looking at while the price is below 300p. The bad news is fully reflected in the share price.

Is Hester Up to the New Challenge?

Insurance is every bit as much a gamble as bookmaking. You calculate the odds and stack them as far in your favour as you can but events can wreck your calculations. I don’t invest in either.

I do have high hopes that Stephen Hester, the man who turned around Royal Bank of Scotland (RBS), will eventually work similar magic at RSA Insurance (RSA) but insurers, although also in the finance sector, are not the same as banks.

This week’s results offer no suggestion that the problems are over and the prospective dividend is reduced to less than a third of its former level. Stay well clear.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Morrison (Wm) Supermarkets PLC197.83 GBX-0.71
Royal Bank of Scotland Group (The) PLC217.85 GBX1.33
RSA Insurance Group PLC572.80 GBX-0.10
Sainsbury (J) PLC194.75 GBX-1.94
Tesco PLC233.00 GBX-1.06

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.

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