I recently returned from a trip to the UK where I spent time meeting with fellow Listed Investment Company (LIC) fund managers, research houses, stockbrokers and various LIC industry participants to discuss industry trends and insights into the market more broadly.
As quite an aside, in my travels I was fortunate enough to bump into actor James Nesbitt (star of Cold Feet and The Hobbit) out at a restaurant. You may be interested to know that amidst a wide-ranging discussion covering acting and rugby, James said his favourite Australian restaurant is Catalina’s in Rose Bay, Sydney.
Below are my four main observations investment observations from the UK and what they could mean for the Australian share market.
1. New economics manifesto taking Europe by storm
A new book by French economist Thomas Piketty is taking Europe by storm. From London’s financial district to Westminster, the city is abuzz with discussion of Piketty’s ‘Capital in the Twenty-First Century’, which discusses wealth and income inequality. Piketty shows that the return on wealth is greater than the growth in income in a capitalist system. The book was published in English just last month, (after being published in French last year) and is already on top of Amazon’s Best Sellers list.
2. Legislative changes to be major benefit to UK LICs
Until recently, British pensioners were required to invest their savings in annuities. Legislative amendments announced by Britain’s finance minister George Osborne, as part of the March Budget, are set to change this policy so that pensioners have the ability to invest in a range of investments. The move has been disastrous for companies with annuities businesses but a boon for other investment products, including LICs, which offer investors exposure to a diversified portfolio of growth shares and a running yield.
3. Housing market hot
Britain’s housing market has been incredibly strong, not only in London but across the country, driven by interest rates at around 2%. Recent figures show median house prices jumped 8.5% over the last year and are up around 12% since the market’s low of June 2009.
4. UK economy strong
The UK economy has launched a strong recovery over the last 12 months, with British GDP predicted to grow at 2.9% this year. Due to falling unemployment and low inflation, the IMF’s recent World Economic Outlook report forecasted the UK to be one of the fastest growing of Europe’s advanced economies. Added to this, the outlook for the nation’s manufacturing industry is the best it has been for 40 years and the sector is expected to grow at 3.8% this year.
What does this mean for Australian shares?
Effectively, Britain’s economy was in a terrible mess for some time. However, there are clear signs that because they’ve ‘taken their medicine’ their economy is improving. It appears the UK economy is now following the same growth trajectory as the US.
If these two countries continue to progress in this positive direction, the policy imperative for stimulating their economies diminishes. Already, we have seen the US Federal Reserve cut their stimulatory bond-buying program from US$85 billion per month to US$45 billion per month.
This leads us to believe we are edging closer to an interest rate tightening cycle globally. We anticipate this process to start first in the US and the UK before Australia and, when this happens, we expect the Australian dollar will fall back to 80c or below.
This development would, of course, be welcome news for export-focused businesses and companies with a significant amount of their earnings offshore such as: News Corporation (ASX: NWS), Brambles (ASX: BXB), QBE Insurance (ASX: QBE) and Resmed (ASX: RMD).