There was some apparently positive news last week about UK companies. Something rather strange has been happening – they have actually been increasing their capital spending. Now this may sound odd, as corporate investment has generally slumped in recent years. In fact more has been directed towards share buy backs (which is hardly investing for the future) and dividends in an effort to pacify shareholders; not wonderfully creative and generally shows little confidence in the future. Additionally a further issue has of course affected many companies, and that has been the shortfall in pension funds which has also diverted company funds away from investment.

The 4th Quarter figures from the Office of National Statistics indicated a growth of 11.1% - much larger than expected. If this continues then this comes at a timely moment when the economy may be slowing as a result of a downturn in consumer spending. However, before we get too excited, this investment was not smoothly spread across the economy. Most was related to North Sea oil company investment and if you remove their impact then the growth figure drops to a more paltry 5.5%. Or to put this another way, investment in manufacturing actually fell by 4.5% and the retail and distribution sector cut investment by 2.3%.

No doubt The Chancellor will be bragging about the growth of investment in his Budget (now set for 21st March), so please recall these underlying figures when we listen to his siren speech. Perhaps he should be concerned that as he has raised taxes on North Sea oil production, should oil companies start moving their investment elsewhere, then our national investment figures will look pretty weak.
 

March 21st will be his 11th and last Budget (although as the Prime Minister is also the First Lord of The Treasury, we can assume he will still be directing operations there) and it will interesting to see what his swansong statement will be? Triumphalist (as usual), and no doubter greener than the freshest leprechaun, but probably not admitting to some of the structural weaknesses in our economy such as the level of national and personal debt, and where the next round of growth is expected to come from. 

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The announcement on Friday about the London Stock Exchange’s anticipated linkage with the Tokyo Stock Exchange was some positive news which can at least put the London operation on the front foot again and get away from the seemingly endless defences against predatory barbarians. As I have mentioned before, I believe it is vital to have a local exchange focussing on raising capital for business and especially, but not exclusively, for UK businesses. However, we also need improved international linkages and this move is in the right direction – east!
 

Tokyo however, has issues to address, not least of which is confidence in its somewhat unreliable trading technology. That aside, the opportunity to have shared trading and the chance for round the clock markets along with jointly traded products sound like some healthy innovations. We shall await further practical developments.
 

Maybe from here we might see how this strategy pans out, and it would be good to see other such initiatives in the growth areas of world such as India?
    

The Bank of England Monetary Policy Committee minutes also revealed some interesting views. The most important issue has been that of inflation and Charlie Bean, the Bank’s chief economist, warned in a speech about the continuing concern over inflation, especially if the trend of rising pay settlements continues. The key problem has been that the official inflation indices (both CPI and RPI) bear absolutely no relation to the day to day lives of negotiating employees. The result is that there are bound to be higher than “official” inflation claims. The most sensitive area is most likely to be in the state sector and no doubt we may all be feeling the effect of that over the next few months.
 

The minutes also indicated the voting split, with two members still voting for an increase but the others voting to hold for the time being. The market is still anticipating another 0.25% rise, but the minutes underlined a growing concern about the possibility of “excessive tightening” impacting with too many rises too quickly. We must wait for the next meeting. 

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And finally…..good news on the increased turnover of the NHS in the South West. A patient in a Devon hospital recently found that in the time it had taken her to go to the loo, her bed had been occupied by a new admission. 

I was also pleased to read that justice had been fairly handed down to a lady in Lincolnshire who was given an ASBO for singing Gary Glitter songs at too great a volume in the bath. Frankly, I think she got off lightly.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management