Don't Bank On It
Measures announced by the Bank of England to kick start the economy are certainly better than nothing - indeed they are much better than nothing - but the impact may be more psychological than real.
Cutting the Bank's base rate to 0.5% and leaving it there has done nothing to get the economy going, mainly because that is not the rate at which individuals and companies can borrow from the banks. Mortgage rates have in fact been edging higher as the banks attempt to rebuild their profits, a policy that fails because it discourages people from borrowing.
Nor has quantitative easing achieved anything other than to lower the UK government's borrowing costs, desirable in itself but ineffective for the wider economy.
So putting up £140 billion to finance lending to home buyers and small businesses is well worth a shot. There are, however, several potential problems.
Will the banks use the facility? They are not short of cash and if they cannot or will not lend what they have, why should they borrow more from the Bank of England? They are showing little enthusiasm for lending to small businesses.
Will first time buyers step up to the mark? Many people who would like to own a home in London and the South East simply cannot afford to get onto the housing ladder and while they pay hefty rents they cannot save a deposit. Meanwhile, there are people across the country who are unemployed, or have seen their wages held down, or face the prospect of losing their jobs. These poor souls are in no position to start buying.
Will small businesses start to borrow? Those that have done so in the past have learnt the bitter lesson that borrowing puts them at the mercy of the banks and that banks cannot be trusted. While some do wish to borrow, they may have found that so far they have been unable to persuade their banks to cough up the cash. Many more are likely to feel that they would rather pass up the chance of extra business than get in hock to a bank that might ratchet up interest rates or pull the plug.
I hate to put a damper on things and this is one of many instances in this column where I desperately hope that I am proven wrong. However, the muted response of the stock market to the emergency funding, other than a boost to banking shares, indicates that I am not alone in my skepticism.
Make Money, Not Goods
The Bank of England's money lending scheme follows poor manufacturing output figures that have put another blot on the UK's recovery hopes. On that count we should be pleased that the initiative is seen as more of a boost for the finance sector than for making goods.
There seems to be a lingering hope that somehow, against all odds, we can turn round the manufacturing sector after decades of decline. I think that is highly unlikely, which is why I have largely avoided putting manufacturing companies into my share portfolio.
Labour costs here are too high compared with many parts of the world and it does not help that various governments, including the current one, have proven utterly hopeless at reducing red tape.
If costs are higher than elsewhere, then you need some kind of expertise that commands premium prices for your products, as the Swiss have demonstrated over the years. Given that our education system goes from bad to worse, with successive governments in denial, there is little hope of that.
The one manufacturer I do have in my portfolio is Severfield-Rowen (SFR), which has issued a profit warning. I bought into the structural steelwork maker three or four years ago because I felt that my portfolio was unbalanced and the shares were strongly tipped in a newspaper whose judgment I trusted.
I had an uneasy feeling about the investment and, since I am a great believer that gut feelings should stand alongside fundamentals and charts as the three great and equal investment tools, I wish I had taken more notice of my inner qualms. In the event, I have had several dividends to help to offset the loss in the share price and the very modest size of my holding means that a 7% slump in the share price after the profit warning is not too big a blow.
It is hard to know what to do next. I am sticking with my investment and I hope that I am not being unduly influenced by the fact that it is in my ISA portfolio. Tax concessions in any guise have a tendency to encourage inefficiency and it is wrong to judge an investment on personal tax considerations.
Severfield says that costs have overrun on two projects by a total of £1.6 million, halving profits in the first half. The full year will now probably come in at £11 million pre-tax, well down on previous expectations but still ahead of the £10.1 million recorded last year.
The share price has no doubt reacted so badly because one profit warning has a nasty habit of being followed by two more. The company did warn last month in a trading update that conditions were very tough in the UK and that a recovery in its markets was still distant, so perhaps we can count that as two warnings down and only one to go.
I can't see much hope of a recovery in the share price until the dust settles so I am certainly not topping up my holding at this stage. There could be a better chance to buy in towards the end of this year.
UK Retailers: Some are Hot, Some are Not
To hear my thoughts on Sainsbury and Tesco's latest first-quarter trading statements, watch the Weekly Wrap with Holly Cook and Alanna Petroff:
The Weekly Wrap: Spain, Tesco vs. Sainsbury, WPP
Market Performance: June 11 – 15, 2012
FTSE 100: +0.80%
FTSE 250: +0.29%
FTSE All Share: +0.89%
FTSE Smallcap: -0.21%
FTSE AIM 100: -1.75%
FTSE Fledgling: -0.75%
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