With the UK finally confirmed in recession, we at Fiducia remain optimistic that Q4 08 and Q1 09 will turn out to be as bad as it gets in terms of economic growth – global economies having effectively stopped as a result of the Credit Crunch. While we acknowledge there will be further quarters of negative growth in 2009, we expect the slowdown to reduce from the summer.
Governments are panicking and injecting large amounts of liquidity into the global economy. In particular we note the size of the stimulus package in China, which is 14 times that of the UK. For social reasons China needs to grow at c8% pa and its Government is determined to ensure this. Already capital requirements for banks have been reduced in order to increase lending and while this is a domestic Chinese story it will obviously benefit the rest of the world. Hence our view that we expect to see “bamboo shoots” appearing in the near future.
We also see light at the end of the tunnel for the UK economy, albeit nearer the end of 2010 but there are still concerns over whether stimulus policies will work, and sterling is taking the strain.
Concerns over public debt are having an impact on the gilt market, especially at the long end where yields have risen sharply recently. The Government’s increased spending will lead to a significant increase in bond issuance which will further increase yields. It is therefore likely that gilts have reached their limits in terms of performance, hence our preference for corporate bonds for those in search of less volatile returns.
We currently see fair value for the FTSE-100 index at around 5,000-5,200 but because of the constraints on banks in the medium-term believe that the market is unlikely to significantly overshoot this level in the next two to three years.