The Chancellor seems to have run out of your money. Figures this week show the dire state of the nation’s finances, with borrowing in the first six months of the 2014/15 financial year £5 billion higher than in the previous first half. Borrowing was supposed to be down 10% this year. Instead, it will take a miracle to hold the full year figure steady, even if statistics issued so far are heavily revised in the Chancellor George Osborne’s favour.
Government spending rises, despite the claims that it is being heavily reduced, while the creation of low paid jobs fails to produce the much-needed increases in income tax.
Since no party is serious about tackling the big tax dodgers among companies and non-dom residents, the deficit will not be eliminated by the election after next, which has implications for the gilts market that funds the profligacy.
Gilt prices have been propped up by funds that regard the UK as a safer bet than most other countries, which is true. Would anyone in their right minds buy Greek government bonds even with a 10% yield? As world debt spirals out of control – and across the world government debt levels are higher than before the financial crisis – the risk of default increases.
An increase in official UK interest rates looks further away than it seemed to be a month ago. Inflation remains subdued, more so than expected, and no other Monetary Policy Committee member has crossed the floor to join the two hawks voting for a rate rise.
Despite the continued reluctance of the Bank of England to raise interest rates, though, gilt yields are likely to rise next year, which means gilt prices falling. Such a scenario has become more likely because the Chancellor, having no scope for reducing taxes in the pre-election Budget, has hit on the jolly wheeze of allowing the over 55s to draw cash out of their pension funds and squander it, as most people given the chance inevitably will do.
You can be sure that the favoured recipients of what is after all their own money will not use it to buy gilts. The pension funds currently holding the cash will, however, have a fair slab of it in gilts and they will be forced to sell in order to fund the withdrawals. I wonder if the Chancellor has thought this one through.
Retailer ASOS Share Price Collapse
Online retailer ASOS (ASC) has seen its shares collapse by two-thirds since February, which seems pretty harsh for a profitable company that is growing sales.
It shows the dangers of leaping on the bandwagon when a company’s shares shoot away, as they did in past years, on unrealistic expectations that profits will continue to soar indefinitely. When the crash does come, the shares tend to drop like a stone, possibly going too far in the opposite direction.
Asos was certainly unlucky having its warehouse burnt down but there have been other issues such as a slowdown in international sales and price reductions in a competitive market that led to three profit warnings.
We are probably over the profit warnings now and the insurers have coughed up for the fire damage plus disruption to the business so it is tempting to buy the shares at current lower levels in the hope of recovery.
Caution is called for. The shares leapt £3 on the latest results, demonstrating that overreaction in the stock market is still happening as far as Asos is concerned. That was more than enough to price in better prospects. Asos is still on a high price/earnings rating and it does not pay a dividend.
Buying into a retailer on the hope of getting the bounce in its shares right is a risky strategy. The fall in UK retail sales generally in September was something off a one-off, caused by milder weather, but it was still a timely reminder of how tough life is in the sector, even for online offerings.
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