Money vision for 2011Posted on: 27 January 2011 by Rhian Mainwaring
Peter McGahan, our resident financial expert discusses what 2011 will bring for the housing and stock markets. It doesn't make for pleasant reading...
There are too many negative drivers against the UK housing market now to see any sense of sustainability of prices. The cuts taken will begin to have their impact within the next year. The future cuts will also begin to have an impact and the threat of job loss will only serve to ensure that the public do three things: Reduce whatever debt they have as quickly as possible, reduce their spending, and tighten any thoughts of dreams for the time being. Currently, we are all still living in the dream world of almost negative interest rates and the economy cannot really stand any interest rates rises.
However, there have been threats of this increasing and I suspect that is simply to accelerate the process of savers deleveraging (paying off debt). I believe the public have become used to interest rates at the current level and have acclimatised to that. That attitude will need to be altered and I suspect there will be further talk of interest rate rises (although unlikely to happen) to accelerate debt repayment.
There is still an excess of property in the UK and plenty of building sites that remain half started or not started at all. There is not a demand. There is, however, a demand for property that is affordable. Incomes across the UK will be under pressure as wage cuts make their way back into the market and put pressure on other companies to reduce theirs. The public sector is often seen as the barometer for income standards and we all know how both incomes and actual job levels are under pressure there.
And so, with job insecurity, falling income pressure and slow demand, it's difficult to see how house prices could increase any time over the next two years above today's levels. If anything, the move to support affordable property assists in depressing the lower end of the market. Furthermore, with the potential threat of students coming out with colossal debts coupled with the requirement to put down c10% deposit, it's hard to see how that first rung of the ladder will ever exist. Few will board a ladder with a missing bottom rung.
As for markets, you would expect them to be under similar pressures (and they will) but consider the benefit of the weaker sterling and what that means for UK companies with strong overseas earnings. It's widely known that the FTSE 100 companies gain 70% of their earnings from overseas companies. Furthermore, for Mr UK economy, the weakened currency has two key benefits of allowing both imports to become expensive thereby reducing their attractiveness and exports to be more inexpensive. Tourism in the UK will also benefit from this.
The FTSE100 has largely been overlooked whilst emerging markets have performed well but I don’t believe that will continue this year. They are probably worth taking profit given their exciting performance and the potential lack of sustainability of that performance especially if the speculators begin to take their profit.
Strong UK companies with excellent balance sheets exist and are undervalued and as such these value companies should excel. There are many ignored companies in the UK sector and Invesco Perpetual's income fund should reverse some of its underperformance with some strong figures for the year.
I expect with cash building that mergers and acquisitions may rear their attractive head. So for a change (question of sport) staying at home may be the best option.
If you have a financial query or would like a review of your investments call Peter on 0845 230 9876, e-mail firstname.lastname@example.org or take a look at our website.
The value of shares and investments can go down as well as up
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.All information is based on our understanding of current tax practices, which are subject to change.
If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email email@example.com.
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