UK not an attractive investment option post-budget

Posted on 23 June 2010 with 1 comment from readers

The scale of the cuts in public expenditure that are going to be introduced to rebalance the UK economy are not good news for investors as this means a double dip recession is not just inevitable but being planned.

The new UK finance minister George Osborne says the debt reduction will be achieved 23 per cent by higher taxes and 77 per cent by spending cuts. This will mean a huge shrinkage of the public sector and necessarily weaken the private sector. Outside of health and overseas aid, expenditure cuts in excess of 25 per cent are promised this October for all government departments.

That $61 billion spending reduction will mean an unprecedented seven per cent contraction of GDP, and one million on the dole queue in four years.

Poor investment

Investors who seek above average GDP growth rates are not going to find it in Britain. Moreover, the main investment classes in the UK are quite clearly overvalued and due for a downturn.

Just look at the yields on investment properties. They are far too small to justify the capital at risk which would generally earn as much and be completely safe in a bank.

Or the stock market where analysts’ profit expectations are far too high for what lies ahead. A new age of austerity will strike profits from multiple angles. Not just lower public sector orders but lower disposable income due to pay freezes and higher taxes.

Perhaps the new government is right to get on with this painful process and atone for the poor inheritance from its predecessor. One in every four pounds spent in the UK public sector is currently borrowed. But try to spin this as good news for investors and you do really struggle.

House prices

Surely as the reality of this austerity dawns the over-reaction will be the opportunity. House prices will drop 50 per cent as they did in Dubai a year ago. The stock market will crash again.

Then the bold will buy, if they have any cash or gold, and the foolish or desperate will sell. This is doubtless not how the new government would present this opportunity. Eventually the private sector will recover after the devastation of the public sector, and this is quite Thatcherite.

But the mantra seems to be a Churchill style pulling the nation together and sharing the burden. Investors will very soon wake up to just what that means as will the whole country. Those commentators impressed by the bright, young Mr Osborne are being fooled.

The error is independent action. As each country in Europe competes to become more austere than its neighbour this trading bloc is creating a dangerous downward spiral.

Investors are best advised to sit this out and wait until asset prices undergo a substantial correction. They are only being held at present levels by super low interest rates that will have to go up as a part of the rebalancing act.

Mr Osborne presented his case brilliantly but this is like complementing a surgeon as he removes your leg.