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*** Inflation wears a beret...what 2020 means to the bond market...
*** New house prices down...housebuilders up!
*** Oil & Gas - three penny shares...what your pension won't give you...India...China...and more...
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- A new day, a new Pope, but the same old rock for investors and savers. Inflation used to mean a rise in the cost of living. Then, thanks to a government fiddle at the end of 2003, it stopped meaning anything much.
- No one ever got sacked for letting inflation run between 1.2% and 1.6% per year, as it did for two years, after Gordon Brown switched us off the boring old RPI measure...onto the beret-wearing, Gauloise-smoking CPI from Europe instead.
- But oh la la! 'Inflation hits 7-year high,' say the headlines this morning. Not even the beancounters at the ONS could pretend oil prices didn't rise more than 10% in sterling last month. Together with a sudden lack of heavy discounting by furniture and clothing stores, these rising energy costs helped push Consumer Price Inflation 0.3% higher to 1.9% per year...just one click shy of the Bank of England's target.
- 'Our view is still that the next move in UK rates is up,' says John Butler, UK economist at HSBC. In fact, Mervyn King and his team at the Monetary Policy Committee hadn't forecast inflation reaching these levels until spring next year!
- But with Brent crude pulling back below $50.50 per barrel, how long can this inflationary blip last? 'About 15 years,' was the answer from government bond investors on Tuesday. They sold gilts redeeming before 2020...but bought even more long-dated paper. Thus the yield on 5-year gilts rose three clicks to 4.58%; thirty-year bonds closed the day yielding 4.49%.
- The future looks rosy to stock market investors too. Yesterday's inflation data couldn't stop the FTSE100 bouncing like a ball of Silly Putty. After dropping 2.7% in just 3 sessions, London's blue-chip index put on more than 28 points to close within spitting distance of the day's highs at 4,855.
- 'We lurched from fear of higher interest rates and inflation to a slowdown in the whole global economy, with no in-between,' one dealer smiled to Reuters last night. 'Obviously it's not as bad as that.'
- Less obviously, however, the volume of shares traded was a poor-to-middling 2.6 billion. And if things ain't so bad, how come house prices are tumbling?
- Unless you've already cashed in your property profits, there's a queue up ahead. 'Available supply [of houses unsold] is still 23% higher than a year ago,' said a report from RICS, the trade body of chartered surveyors on Tuesday. The net balance of its members reporting a fall rather than a rise in UK house prices was 37% in March, up from 34% in February.
- No end of excuses from the surveyors quoted by RICS in its survey. 'The Easter holidays/forthcoming election are suppressing activity,' said one. Others reckon the weather's at fault. Yet another blamed the newspapers...
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- But simply put, UK house prices are falling because no one is buying. In dispatches to RICS telegraphed from Grantham in Lincs, one surveyor admitted: 'Busy putting on new instructions. Lots of activity not necessarily producing sales. Number of sellers changing agents owing to properties not selling.'
- Still, who cares if the price of new-builds has been knocked 10% lower in Hay-on-Wye, as the RICS report reveals? Shares in the FTSE Construction & Building Materials bounced 1.4% yesterday. Real Estate stocks rose nearly 1% on average.
- The other top places to have your money on Tuesday were Electronics, up 2.5%...and Household Products, which also rose more than 2% higher.
- Mining stocks bounced hard, with Antofagasta gaining 3.1% to £18.81, while Xstrata rose 2% to £9.59. The Oil & Gas sector outperformed, too - up 1.1%, as BP regained more than 5p to £5.28. But once again it was the penny-stock end of the energy sector that rose fastest. The top 3 gainers were Alkane Energy, up 10% to 17p...Circle Oil, up 13% to 33p...and Black Rock Oil & Gas, up 16.7% to 2.1 pence.
- Just to prove oil's resilience, shares in Cairn Energy rose 4.5% even as it reported a slump in profits! Turnover fell too, down from £156m in 2003 to barely £110m in calendar 2004. No dividend was paid. Yet the stock ended more than 50p higher at £11.52, thanks to Cairn raising the output target for its oil fields in Rajasthan to 120,000-150,000 barrels per day from 80,000-100,000.
- 'At the moment, given what the market's done, it's not surprising to find stocks that investors have liked being revisited following sudden weakness,' said one equity analyst after the markets had closed. But if you're looking for the rally that started in March 2003 to resume after this month's big dip, beware the new strategy for global investors.
- Right now, pension funds the world over hold between 50-70% of their money in stocks and shares. '[But] some...are moving towards 50% equities, 30% bonds and 5% each in emerging markets, private equity, commodities and hedge funds,' says Roger Urwin, head of investment consulting at Watson Wyatt.
- 'Their risk is big and it's concentrated in equities...You need multiple sources of return drivers,' Unwin adds. But in Britain, he thinks, 'allocations to alternatives are unlikely to go above 10%.'
- In short, your UK pension fund manager might keep you invested in shares...while everyone else trims their holdings...and he won't give you exposure to China and Asia, long-short strategies, oil or base metals either!
- Just the things you might need, in fact, should inflation REALLY take off...
Until tomorrow, your locum remains &c.
Adrian Asfor Money Wee
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