How to invest in the age of austerity
Fund manager Anthony Nutt, who has a solid track record of picking decent income shares for Jupiter, is the guest writer for this week's Daily Mail Investment Extra column.
The cure for a typical recession is to lower interest rates to stimulate companies and households to borrow money and buy things. Yet base rates are just 0.5% and nobody wants to borrow.
Instead, consumers, worried about rising taxes and job security, are saving, not spending, while banks bolster their balance sheets to preserve credit ratings.
This will probably continue until all have reduced their debts to more tolerable levels, which could take another five years.
The lessons of greece and Ireland are sobering, hence the need for spending cuts in the UK even more dramatic than those imposed by the International Monetary Fund in 1976.
There is no problem with the majority of companies. Many are in excellent shape and are upbeat about prospects for their own sales, margins and profits. rather, the country is about to experience a public-sector recession. We have been here before. In 1921, Prime Minister Lloyd george appointed Sir eric geddes as head of the Committee on National expenditure after the national debt ballooned following the First World War.
The committee identified appalling waste in government spending, such as there being one cleaner for every vehicle in the army. The so-called 'Geddes Axe' led to savings of about 6% of GDP.
Today's Geddes is the man who turned around British Home Stores - Sir Philip Green. Prime Minister David Cameron asked him to perform an efficiency review of Whitehall departments. In a curious echo of Sir eric, Sir Philip found the government had bought some six million mobile phones, one for every public sector worker.
But what could this mean for private investors? Those who have invested in retailers may worry that they are doomed, but the reality could be different.
Consumers have already altered their shopping behaviour even though austerity has yet to hit. As early as December 2008 there was a sea change in the sales of home hair-dye kits and packets of vegetable seeds. More recently, despite the forthcoming VAT rise, shoppers do not appear to be bringing forward purchases of big ticket items.
Supermarkets will respond to the coming frugality. expect them to distract shoppers from higher prices with ever-changing short-term promotions. They will open more convenience stores and sell more highermargin, non-food items. giants like Tesco should benefit from the huge amount of capital invested overseas in Asia and elsewhere, where growth prospects remain strong.
Non-discretionary items, such as car insurance, can be surprisingly profitable. For example, Admiral, owner of Confused.com, is a well-run insurance company and even in a weaker environment it should increase its market share and achieve longer-term growth by expanding into europe.
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Private-sector companies that depend on government contracts face an uncertain future. Some may lose contracts, while others may benefit from greater outsourcing.
Suffolk County Council recently announced a radical plan to outsource almost all of its services and other authorities may follow suit, particularly as some may need to cut as much as 28pc over the next four years following the spending review.
For companies such as Mitie and Capita this may be a doubleedged sword, with more contracts but at less profitable rates.
Much of the pain has already been priced into the market, to the extent that the bias against companies exposed to public spending is so extreme that there are now attractive opportunities in some unfashionable areas.
Companies such as BAE Systems and Logica have been shunned, despite the fact that only about 20% of the value of their business comes from government spending. Valuations are low and the reality of negative earnings pressure is not as great as many people think.
There are opportunities in the present market, with the aim of reaping the benefit over the longterm, particularly via the growth and reinvestment of attractive dividends alongside the improved health of the UK economy.
• Anthony Nutt is a director at Jupiter Asset Management
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