Economic Recovery Fuels Markets and Merriment

THE WEEK: Recent economic data have fuelled both US and UK stock markets, and Greene King this week showed its resilience has paid off amid the economic recovery

Rodney Hobson 4 July, 2014 | 1:57PM
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Business as Usual

The Dow Jones Industrial Average has ended the week above 17,000 points for the first time; all sectors of the UK economy are powering ahead. It’s business as usual for investors seeking a home for their extra ISA allowance, renamed NISA allowance.

I do admit to being a bit nervous of buying shares at current high levels, despite my view that the FTSE 100 index will top 7,000 points this year. The pattern of the FTSE since markets collapsed in 2008 is to trade sideways erratically for several months then break higher. I expect to see a repeat once the index has broken through the current ceiling just below 6,900 points.

What galvanised world markets most was the creation of 288,000 jobs in the US in June, well above forecasts, plus an upward revision in the May estimate. This has calmed nerves that were tested when the American economy was judged to have shrunk heavily in the weather-hit first quarter.

The Dow is up 3% so far this year but I would not encourage shareholders in US stocks to take profits at this stage. The American economy is standing up well to the reduction in quantitative easing, which should be brought to a welcome halt well before year end. I’m confident that US stocks have further to rise.

Here in the UK all sectors of the economy were performing well in June and there is no doubt that the second quarter will show strong economic growth. Business information provider Markit says services, manufacturing and construction all recruited more staff last month and created 400,000 jobs in the second quarter.

It is increasingly difficult for anyone who has been building a share portfolio since 2009, as I have, to find shares that look seriously undervalued but the stock market still offers the best value to investors, especially as banks are reported to have reduced interest rates on ISA cash savings accounts.

A Cunning Plan?

Reducing unemployment helps the economy twice over by cutting government spending on benefits and increasing tax revenue but until we force major international companies to pay their fair share of tax on profits we will never close the budget deficit. The economy is back to pre-crisis levels but the budget isn’t.

The big villain in all this is Luxembourg, the tax dodger’s paradise at the heart of the European Union. Now the EU has appointed Luxembourg prime minster Jean-Claude Juncker as president of the European Commission. So the man who has cheated EU governments out of billions in tax revenue is moving to the top of an administration that is finally tackling tax dodging, especially in Luxembourg.

This may have unexpected highly beneficial consequences if poacher Juncker turns gamekeeper.

Once Bitten, Twice Shy

When problems first arose at Balfour Beatty (BBY) and shares fell, I topped up my holding because I felt that the group as a whole had a great future. Since then news has got gradually worse and I decided there would be no more topping up until problems were resolved.

The latest warning, that profits at the troubled engineering services section will fall even further, may have been overdone in order to throw full blame on the departed chief executive, but possibly not. Selling other business to make up the profit shortfall sounds a dubious tactic. I’m retaining my holding because I believe that Balfour will get over its current difficulties but I won’t throw good money after bad despite the heavy fall in the share price.

The Beer Isn’t Flat

I was surprised that shares in Greene King (GNK) fell initially after full year results were in line with expectations. Sales have grown year by year since the credit crunch and consumer spending will surely continue to recover.

Trading has, not surprisingly, been strongest in London where economic recovery has taken hold faster, while pubs in the North and Midlands have struggled. That should be rectified as prosperity travels beyond the M25.

Investors were spooked by news that trading since the beginning of May has been more sluggish. However, the shares are well down from their 12-month peak and the yield is an attractive 3.5%. They are well worth looking at.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Balfour Beatty PLC353.60 GBX0.74

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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