Bad times but there is hope for the future

Published on Monday 23 June 2008 10:24

THIS month has been awash with headlines delivering bearish news.

At a time of rising inflationary pressure, soaring commodities prices and slowing growth, it is no wonder there are rumblings about the possibility that the UK is entering a period of recession.

Inflation and interest rate expectations continue to drive global financial markets, while UK consumers are dealing with the fallout of the weakening economy as food and oil prices soar and house prices drop.

With such negative sentiment saturating the country, it is inevitable that attention turns to the UK stockmarket. Some believe its behaviour is a litmus test for the economy, and, in particular, its weakness indicative of the likelihood of recession.

In such turbulent times, is the UK stockmarket presenting us with warning signs? Adversity is apparent, and although the UK stockmarket does highlight economic hardship, it is not a harbinger of doom, or as closely linked to the economy as commonly believed.

In truth, there are very attractive opportunities in the UK equity and credit markets, particularly for an actively managed fund. The UK stockmarket contains many companies that are in the FTSE indices but generate their profit from overseas activity.

For example, while the mining sector is almost nonexistent in the UK economy, mining companies account for 12.71 per cent of the UK stockmarket; likewise energy production represents 4 per cent of the economy, yet the oil sectors embody 19.26 per cent of the market value.

Both these sectors have been significant beneficiaries of the commodity boom of recent times, attributable to overseas demand fuelled by growth in emerging economies like China.

A number of recent developments in the credit markets give us confidence that investment opportunities are opening up for investors in corporate bonds. There may come a time when the UK stockmarket will not be immune from the persistent downbeat domestic news, yet even in this downward spiral there are investment opportunities for active managers and therefore significant ability to shine light in the darkest tunnel.

Stephen Adams is head of UK equities at Aegon