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Everyone knows that the US is facing the very real prospect of recession.
In fact, it may already be in recession. You don’t tend to find these things out until well after the fact – GDP figures are of course historical, and they are often revised quite significantly, years after they were first published.
But so far, most mainstream economists have been keeping quiet about conditions on this side of the Atlantic.
Until now, that is…
This morning’s papers hold a litany of bad news for the UK economy in particular. David Owen, chief European economist at Dresdner Kleinwort, reckons the odds of a recession in the UK now stand at around 50-50. He reckons the main driver will be the slump in the housing market.
“I’m no longer comfortable with this view that the housing market can just tread water for a few years,” he tells The Telegraph. He points out (as we’ve mentioned ourselves on more than a few occasions) that house prices in the three post-war ‘crashes’ (with the market peaking in the late 1940s, 1973 and 1989) fell by 30% each time in real terms – that is, adjusted for inflation. “There is always a severe correction following a bubble.”
It looks like he’s not the only one worried. Landlords are apparently selling out of the market at the fastest rate in three years. The Royal Institution of Chartered Surveyors reports that the proportion of landlords selling up when tenants move on has risen from 6.1% to 6.5% in the past quarter.
What else is happening? Well, forget cheap shopping in New York next Christmas – HSBC has said it believes that sterling will fall to $1.76 against the dollar over the next 15 months, as the UK economy weakens. In fact, that particular collapse is already happening. The pound managed to claw its way to $2.11 earlier this year, but has already fallen to around $2.02.
A warning from Down Under – steer clear of commercial property
Oh, and if you think that commercial property stocks are looking cheap now, as some commentators are saying – and many of them are indeed trading at huge discounts to their underlying portfolios – then pay attention to what’s happening in Australia just now.
Shopping centre owner Centro Property (CNP) saw its share price fall by 75% yesterday after the group warned it is having trouble refinancing some of its debt. It said that “to secure long-term financing in the current illiquid credit market, Centro will need to reduce its gearing level significantly. These options may include asset sales, joint ventures, and equity injections.”
Fire sales and cheap share issues are not an ideal way to raise money. In other words, the company is desperate for cash.
As one fund manager told The Telegraph: “A real estate stock down 75% in one day is not something you expect to see.” It seems the credit crunch, like a malign version of Santa, has little surprises in store for everybody this year. We’d still be steering clear of commercial property – it’s cheap for a reason.
So what should you buy in troubled times?
Of course, there’s a silver lining to every cloud. Not every business is suffering as recession looms and banks start asking for their money back. Doorstep lender Provident Financial (PFG) is continuing to see strong growth as more and more people are turned away from increasingly fussy high street banks. Customer numbers grew 3.8% in the year to November.
On a forward p/e of around 12 and paying an estimated dividend yield of nearly 8%, The Telegraph rates the stock a buy. I’d agree that it’s an interesting and attractive play on the credit crunch, but it is risky. Bad debt stands at 30% of revenues.
That’s fine, and to be expected, given the type of lender it is. But even a lender with such solid experience of this type of lending could hit trouble if economic conditions get really bad.
There are a few other plays that might be slightly safer bets for a recession – check out this week’s MoneyWeek cover story for some of them (see: Latest Issue). If you’re not already a subscriber, click here to get three free issues.
Also, a slide in sterling is by no means a bad thing. In our Christmas issue (out on Friday), Paul Hill, our resident share tipper, uncovers which stocks are likely to benefit in 2008 from sterling weakness. We’ll also be revealing what Tim Price, James Ferguson and our other experts think is in store for the year ahead.
Christmas is coming…
And just a little reminder – only a week to go until Christmas now. But there’s still plenty of time to pick up “How Much?!”, a compilation of the best – and worst – examples of waste and excess plucked from MoneyWeek’s Bottom Line column. Money Morning readers can get it for the special price of £6.99 – just enter the promotional code MoneyW in the box at the ‘view basket’ stage of your order to claim your 30% discount. Click here to order your copy now.
Turning to the wider markets…
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Retailers suffer pre-Christmas blues
London’s FTSE 100 was dragged down by the property and retail sectors yesterday, ending the day 119 points at 6,277. Reports of poor pre-Christmas trading on the high street, along with news that the Confederation of British Industry is downgrading its economic growth forecasts for next year, hit retailers including Home Retail Group, Dixons and Next. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 fell 90 points to close at 5,514. And in Frankfurt, the DAX-30 was off 122 points at 7,825.
Across the Atlantic, US stocks fell to two-week lows yesterday on renewed concerns over slowing economic growth. Technology shares were worst-hit, with the Nasdaq down 61 points at 2,574. The Dow Jones lost 172 points at 13,167. And the S&P 500 ended the day 22 points lower, at 1,445.
In Asia, shares rallied in afternoon trading as bargain hunters snapped up banking stocks. The Japanese Nikkei reduced its losses to 41, ending the session at 15,207. And in Hong Kong, the Hang Seng added 136 points to close at 26,732.
Platinum hits all-time high
Crude oil futures had risen to $91.05 this morning and Brent spot was at $91.84 in London.
Spot gold was steady at $794.40 this morning, and silver had fallen to $13.86. After hitting a fresh all-time high of $1,494 yesterday on worries over supply disruptions, Platinum had fallen back to $1,485.
In the currency markets, the pound was near a two-and-a-half month low against the dollar this morning, last trading at 2.0191, and was at 1.4027 against the euro. And the dollar was at 0.6945 against the euro and 113.28 against the Japanese yen.
And in London this morning, coal power stock Drax suffered a record drop of 6.6% after announcing that the credit crunch had forced it to abandon its debt refinancing plans. The company revised its full-year profit forecasts downwards by 14% and also announced the departure of chairman Gordon Horsfield.
Finally, our recommended articles for today…
If it’s not a crisis – what is it?
– The bulls are still arguing that the UK may not necessarily follow the UK into recession, and that falling house prices don’t really matter. But it will and they do, says Merryn Somerset Webb. For more on why Britain is about to get the bear market it deserves, read: If it’s not a crisis, what is it?
What’s going on with the gold price?
– Both stocks and bonds are going down at the same time. The dollar has bounced despite some very dodgy fundamentals. And gold sank to a two-week low last week. To find out why – although things may look a little crazy at the moment – the long-term trend for gold remains upwards, click here: What’s going on with the gold price?