Long-term Financial Markets Slowdown
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Official numbers last week showed that, for all the woe, doom, disaster etc discussed in the last few months, there is still an economy out there doing well enough to hold its head above water. The biggest eye-opener was the January tax receipt numbers. In hindsight we should not be too surprised as much of this would have been relating to:
- The superb year experienced in the City up to 4th April 2007 for individuals (tax became due last month),
- The year up to September for business' (3 months in arrears), and
- The fact that some of the biggest corporates are doing very well indeed outside the UK (the Oil and Mining sectors).
Whether the question as to whether number crunchers should, by now, be better at forecasting this data is an argument that could go on well into the wee small hours. Be that as it may there is still a sense of surprise that the UK seems to be sailing a generally untroubled course through the economic waters. On the micro economic scale there do appear to be a few cracks showing. Chelmsford, a boom town in recent years, has rather more boarded up small retail units than you would expect, good jobs in the various employment bureaus are less numerous and in visiting a completed local, very prestigious, housing development on Saturday I was surprised to find that not a single house had been sold (not even the show home) which had the effect of keeping my wallet well and truly stuck in my pocket. If this is my reaction then it does not take much of an extrapolation to say that it probably is of others as well.
Unless there is a single earth shaking event, economic slowdowns do not arrive with the post in the morning, they take an enormous shift in momentum over an entire country’s ability to create wealth to become evident. The natural fiscal direction of most nations is to grow, after all we all work and much of this work is of the cumulative rather than ‘moment to moment’ variety causing the next unit of labour to be more productive etc etc.
There is no getting away from the fact that corporate profits are not as good as would have been hoped some six months ago. Whilst most companies will be holding dividends steady (or for the purposes of good PR raising them slightly) the actual cover of those payments is getting worse. Investors, except for those in Mining and Tobacco, will have seen some solid destruction of their capital worth so boards are sensitive to the fear that shareholders may become disillusioned and sell out. This dividend largesse is done to the detriment of long term growth and, in many instances, will increase the probability of higher borrowing requirements if times get tough. With the banks in no mood to lend cheaply at the moment (or in many cases lend at all!) the effects of this will be the longer term effect on corporate profitability.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Long-term Financial Markets Slowdown' edited by SD, updated 26-Feb-08
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