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Recent Market Commentary – October 2008

Following the Government’s bail-out package announcement we’ve had a glimpse of the future face of the UK banking sector. The sector itself will be smaller, government borrowing will rise, private sector borrowing (mortgages/loans) will fall and we should, consequently, see a reduction in both corporate and household debt. However, we may be in for a bumpy ride before we arrive at this point. We would expect that the journey will be turbulent and that consumers will be negatively affected by this sharp shake-up in the banking system.

We are now expecting a widespread global downturn. This means that we should anticipate sharp and rapid interest rate cuts as central banks attempt to resuscitate growth. On Wednesday 8th October it was announced that the Bank of England has taken the decision today to cut interest rates to 4.5%. It has also been announced that the US Federal Reserve has cut US interest rates by 50 basis points to 1.5%, and the European Central Bank (ECB) has trimmed interest rates from 4.25% to 3.75%.

Invesco Perpetual's equity income star, Neil Woodford, has described the current state of equities as 'bombed out' but has warned investors that the current market chaos is a 'very bad time' for them to cut their exposure to the asset class.

Woodford advised investors that while they should not take money out of equities due to the current liquidity crisis and global downturn, those looking at a three to five year investment horizon, should be looking to add to their equity exposure, albeit on a 'selective' basis.

The Citywire AAA rated fund manager said: ‘The overall index has been very disappointing now for a very long time. I think we are now a lot lower than we were 10 years ago in terms of index performance but I think the asset class now is looking very bombed out and should deliver decent returns over a three to five year period and especially against other asset classes.'

Woodford warned that the UK was likely to face a recession which could last up to two years. However, equities historically rise in a recession and the opportunities are, therefore, not lost.

He said: 'The outlook is very poor over the next 18 months maybe even two years. We are likely to see a recession, falls in GDP, higher unemployment, falling asset prices, falling commercial property and falling house prices. Businesses will find it very difficult, especially those that are consumer facing and cyclical in nature.'

Woodford said he expected sectors such as tobacco, pharmaceutical, telecoms and the oil sector to be in good shape in two years time as economic conditions improved.

The Clouds

Turbulent stock markets - Worried investors
Uncertain banking system - Concern over finding a ‘safe harbour’
Global recession - Potential rising unemployment, falling house prices
Credit crunch - Difficulty in getting a new or replacement mortgage

The Silver Lining

Interest rates falling - Cheaper mortgages
Inflation peaking - Food bills coming down
Oil price falling - Cheaper energy and fuel bills
Stocks and shares - 45% cheaper than last Autumn

Tax Rates for 2008/9

Headline Changes

• The 10p lower rate of Income Tax has been abolished and the basic rate has dropped to 20%
• Capital Gains Tax has been reduced to 18% with no taper relief or indexation allowance
• Inheritance Tax threshold rises to £312,000 and this can be passed between spouses giving a total of £624,000.