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Adviser  >  News  >  October 2008  >  Scottish Life Managed Funds Asset Allocation - October 2008

Scottish Life Managed Funds Asset Allocation - October 2008

Robert Talbut, Chief Investment Officer of Royal London Asset Management, reviews how the UK economy has performed in quarter 3 of 2008 and what the overall investment outlook looks like.

Review of Q3 2008 UK Economy

Although official data are not yet available, the UK economy will have contracted in the third quarter for the first time since 1992.  Activity was flat in Q2 and the news since then has been much weaker.  We now expect that a lengthy period of recession has begun, lasting well into 2009.  Thanks to the effect of higher utility bills, inflation continued to rise during the period and remains well above target.  However, we do expect a substantial fall in 2009 thanks to lower commodity prices and the lack of pricing power in a recession. 

Thanks to the deteriorating economic outlook and the crisis in financial markets, the Bank of England reduced interest rates by 50bps on October 8th and we expect further cuts by year end and into 2009.

Investment Outlook

We continue to expect simultaneous recessions in the US, UK and Euroland.  Lower interest rates and action to re-capitalise the banking sector will help to limit the downside, but the financial crisis has now gone on for long enough to make recession an inevitability. This provides a very difficult backdrop for risk assets such as equities. Markets will turn up well before any improvement in underlying economic conditions, however this now looks to be a 2009 rather than 2008 story.

Asset Class Views

UK Equities

Equity markets generally had a poor third quarter and the UK market was no exception.  Financials suffered from stressed money markets which made funding conditions difficult and both financials and non financials suffered from a sharp deterioration in economic sentiment.  Though equity markets look "cheap" on many measures, the depth and duration of the coming recession remains very uncertain and as such poses a significant risk to profits.  We remain cautious.

UK Property

Given the poor economic outlook in the UK, we expect rental levels to fall over the next 18 months.  This will prolong the property bear market which began late last year, and we remain cautious.

UK Bonds

Government Bonds had a much better quarter as inflation concerns waned and the economic clouds darkened.  Having priced in 3 rate rises towards the end of the second quarter, the market did a dramatic volte face and began to price in a series of rate cuts.  This boosted government bond markets.  Credit markets suffered in line with equity markets and for similar reasons: poor economic outlook and a large fall in risk appetites.

The views in this article reflect those of Royal London Asset Management, 30 September 2008. Investment returns may fluctuate and are not guaranteed.