SVM co-founder Colin McLean warns the credit crunch will hit the UK economy and housing market hard, with small and mid caps likely to underperform as investors flee funds focused on these sectors.
Colin McLean, the AA-rated manager of SVM Global Opportunities, said: “Undoubtedly the effects [of the credit crunch] will spread out a bit more and cause western economies to slow down. We’ll see quite a sharp fall off in consumer confidence in the UK, as we are already seeing in the US.
“It will be recession in the US. We’ve already got property and consumer areas and autos turning down quite sharply there. However, the US will to some extent be able to grab some of the growth back because of the cheaper dollar. In the UK there is less scope for policy changes to remedy things.
“The market is betting on big interest rate cuts re-stimulating things, but I’m not sure those will happen — and even if they did , it might not be enough to get housing going again that quickly. The finance just isn’t there.”
McLean added that Libor (the London Inter-Bank Offered Rate) is in any case unrelated to monetary policy committee decisions and that UK inflation is trending up on the back of rising raw-material inflation, including the rising oil price. “Retail price index inflation is about 4.2% now. That could move up from here, not necessarily as high as 5%, but its certainly going to limit the Bank of England’s room for manoeuvre.”
Asked whether he shares the view of the Ernst & Young Item Club that the UK economy will grow at 2.1% next year, Colin McLean said he believed it will be lower than that.
“I think we’re at a stage where even the companies themselves — including retailers, housebuilders and most of the consumer cyclicals — don’t really know quite what the impact is going to be,” said Colin McLean. “That’s still got to work its way through, and I believe the property market will end up being a bit worse than is being predicted by the market just now.”
Colin McLean also warned the oil price could reach $120 a barrel in the near future and said that once hedging at major airlines like BA runs out during 2008, the cost of travel will rise significantly. Cruise operator Carnival earlier this month brought in fuel surcharges for the first time.
Colin McLean, who co-founded SVM Asset Management in 1990, says he currently a fan of precious metals and gold but less sure of the prospects for base metals. ‘Copper looks like it’s peaked. Some of that story about burgeoning demand for commodities from China and India might break down a bit now.’
Colin McLean added that index-tracking funds and many active funds have had a bad time over the past 11 months. “Passive investment has locked investors into a downward spiral [because of exposure to banks and various other things] and the average conventional manager is behind the All Share this year.
“A number of high-profile alpha managers have had a very bad year as have a lot of equity income people. A lot of those built up their performance on exposure to banks in particular and to other large cap stocks and general financial and consumer cyclicals. However hat has not served them well.
“Some of the value funds bought into housebuilders – yet housebuilders like Barratt or Taylor Wimpey have undone all of the last five years gains in the last six months. And some managers are focused on those,” McLean said
Colin McLean warned UK mid and small caps are going to lose out because of an exodus from funds focused on their sector, and warned the situation would be exacerbated because many small cap funds bought identical stocks. “Many small and mid caps have been driven by funds that have grown with a lot of inflows. If that turns into net redemptions, some of those stocks will take a hit.”
Over the three years to the end of October McLean turned £1,000 into £1,151. In comparison the same amount invested in the FTSE World (GBP) index would have turned into £1,133.
This article was published by Citywire on 5 December 2007. Read the article on the Citywire website