Don't believe the recovery: stay in defensive stocks
By
Associate Editor
David Stevenson May 28, 2009
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Something doesn't quite add up.
Just as Britain gets a ticking off from credit scorer Standard & Poor's - with a threat to cut the AAA rating on UK government bonds – out come the property bulls, and up go bank shares, retail sales, and the pound too.
So is there a real recovery underway in the UK?
No, nothing like it. Here's why, and what to do...
"Spring's brought a resurgence in the housing market", trumpets the Telegraph. "UK banks granted more loans in April", booms Bloomberg. Last week, UK retail sales increased "strongly".
And look at the pound. Currencies are generally a good barometer of how well countries are doing. And at over 1.15 against the euro, sterling's at its highest this year, while 1.60 against the dollar is the highest for seven months. Suddenly those foreign holidays are starting to look possible again.
In a nutshell, nothing too much to worry about, then?
Wrong. The real problems are being masked.
Banks: the Treasury doesn't think we can cope with the truth
Take the banks. The FTSE 350 Bank index has almost doubled in the last 10 weeks. Yet the UK Treasury has just said that it won't be releasing details of the 'stress' tests performed on Britain's lenders because they "may lead to uncertainty in financial markets…which could require further action by the authorities".
In other words, we're apparently not grown up enough to be told the truth. It's like going to the doctor who won't give you the bad news in case it kills you by itself.
So what's the Treasury's statement really saying about the future of bank lending? In short, there won't be very much of it. So no reason for joy here.
Then there are those 'strong' retail sales. But as Vicki Redwood of Capital Economics says, "it remains hard to see this strength continuing while the drag from rising unemployment and pay freezes is building". In other words, there'll be much less money in the pockets of consumers – even those that have jobs.
"Don't let the retail sales figures lull you into a false sense of security", says Roger Bootle in the Telegraph, "the consumer slowdown's still in its early stages". And bankers with balance sheets in dire straits either won't, or can't, advance more money to top up the shortfall.
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It's the same in the housing market. The number of new home loans approved in April did pick up by 4% compared with March. But that only partially reversed the previous month's drop. What's more, overall home loan approvals are two-thirds below their 2006 peak.
"Approvals remain desperately short of the levels likely to stabilise house prices", says Capital Economics' Seema Shah, "the end to the housing market correction remains a long way off". Even the Nationwide, which clearly has a vested interest in property prices rising, admitted yesterday that home values may keep falling for the rest of this year as job losses mount. The link between job losses and falling house prices is very strong, as we pointed out recently - Longer dole queues are bad news for house prices.
Global bad news is boosting sterling
As for sterling, the story's slightly different. That's because the foreign exchange markets are a 'zero-sum' game, i.e. if one currency falls, another must rise. And here, much of the rest of the world is in as big a mess as us.
America seems determined to rack up even bigger debts compared with the size of its economy than we're piling up. That'll make the States even more dependent on foreign lenders than we are – and also mean many extra dollars floating around. Which could cause the US itself to lose its AAA credit rating, says Bill Gross, manager of the world's biggest bond fund Pimco. In short, bad news for the buck.
Meanwhile in Europe, the banks are in a far bigger hole even than their US counterparts, because they 'leveraged up' – i.e. borrowed – much more in the boom times. As fund manager John Mauldin points out, they've lent $1.3 trillion to Eastern Europe "which is in a very serious recession, so many of those loans are simply not going to be worth anything". That means European banks will need massive bailouts, "or we'll watch their economies simply implode".
We can't know exactly how that will play out. But one thing's for sure: it's bad news for the euro.
So what should you do?
Probably keep your pounds – sterling may hold up for the moment. But the stockmarket's a different story.
All those 'recovery' hopes may be misguided, but the 'dash for trash' has pushed up some share prices sharply. In 2009 so far, UK general retailers have outperformed the overall market by a third, while housebuilders have beaten the index by 25%. Even Britain's bank shares have done better than the FTSE All-Share by 3%.
With plenty of bad news to come, these look like areas to keep well away from.
A top defensive stock
Instead we'd stick to more 'defensive' stocks that'll do OK despite the state of the economy. In last week's magazine Roundtable (if you're not already a subscriber, get your first three issues free here) we suggested nine tips that can outrun the recession. In Britain, just about our top tip was National Grid (LSE: NG). Not only is it on a p/e of around 10 and a yield of 6.3%, it's down over 11% this year. Now could be the time to buy.
Our recommended article for today
With a weakened US dollar, strengthening pound and resurgent Australian dollar, right now could offer some outstanding opportunities for investing in currencies.
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