Investors looking to Far East as UK and US face consumer meltdown

ONE of Scotland's most- respected investment houses has predicted continuing economic woes as consumer spending collapses and investors focus on putting their money in safe havens abroad.

James Fairweather, chief investment officer and head of global equities at fund management firm Martin Currie, predicted more heavy weather for the UK and US economies, with the number of company insolvencies in both countries on the verge of a big rise due to foundering consumer spending and tighter-than-ever lending criteria.

Fairweather's analysis of a wide range of global economic indicators guides the company's investment choices for some £12.5 billion of funds on behalf of customers like financial institutions and pension funds.

According to those indicators, debt has rarely been so hard to come by as banks ratchet up lending criteria. Speaking at an investment briefing in Edinburgh, Fairweather said the era of cheap debt driven by low interest rates is over "for a generation" and that this will have a slowing effect on the economy.

"When lending standards go up, corporate defaults rise. And that has only just started," he added. "This is the sharpest-ever rise in lending standards we have ever seen and it has continued to sky rocket."

Another problem facing businesses is a slowdown in consumer spending. Consumers are now spending more on basics such as food and energy and less on "discretionary spending" – even on items like cigarettes and beer which historically have tended to survive downturns .

"The consumer really is in a bad place," noted Fairweather. "Consumers spent their way out of a downturn at the beginning of this decade. Not now. The consumer is completely out of the picture."

However, Fairweather does not expect corporate insolvencies to rise more than they did in the last downturn as businesses going into the most recent credit crunch benefit from lower levels of debt than in previous years.

As a result, Martin Currie, along with other investment firms, is looking to globalise its portfolio away from UK equities towards areas such as the US and the Far East.

Andy Sowerby, managing director or Martin Currie, said: "

The UK is less relevant now. International portfolios are much more important."

Fairweather said there was "still some way to go" before the full extent of writedowns related to toxic assets such as the US subprime market are revealed.

"That is only mortgages," added Fairweather. "It doesn't yet cope with the downturn we might potentially see in the consumer or corporate sectors.

"Consequently the subprime crisis is still in its infancy in terms of the impact."


BACKGROUND

INVESTORS have halved the level of cash they hold in equities during the past six months due to stock-market volatility, a survey showed today. Around 28 per cent of investors said they had moved money out of equities and into more cautious investments, such as cash or bonds.

The average amount of cash investors have in equities has dived from £51,000 to just £23,000 , the Lloyds TSB survey found.

Nearly one in four people said the stock market was now too risky to invest in, and 15 per cent said they did not think equities would outperform cash and bonds in the long-term.

Around 17 per cent of those questioned said they thought investing in equities was simply too stressful.