Money News
Profit expectations for UK companies are too high and should fall by a further 5% to reflect a looming recession, according to Resolution Asset Management.
UK Chief Investment Officer, Peter Reid, believes consensus forecasts for profits remain too optimistic given the likelihood of a US subprime-triggered recession, arguing that even aggressive interest rate cutting by the Bank of England would fail to cure the ills of the UK economy.
Reid thinks a recession would be short and sharp but doesn't expect the economy to pick up meaningfully for at least 18 months, with the stock market likely to mark time in the near term. Although he doesn't believe the economy can be revived with rate cuts alone, he says the Bank of England must be decisive when it does start to act, arguing that inflation fears are overdone.
Despite his pessimism over the economy, Reid believes markets are beginning to price in bad news and says value has begun to emerge, providing a degree of comfort ahead of what he believes will be a very difficult environment for UK companies.
Over the next 18 months he expects to see positive returns from the stock market, albeit marked by periods of extreme volatility.
Reid adds: "The consensus is for UK profits to grow 7-8% in 2008 but we don't think this will be the case, especially given that profit margins are starting from a very high level already. In my view profit expectations need to come down closer to flat year-on-year to reflect what will be a very difficult environment for firms over the next 18 months or so.
"The financial sector is still a huge negative and we are still working through the liquidity problems. Sovereign funds are helping but financial institutions are still finding it difficult to lend and this will continue to hit the underlying economy. This simply cannot be fixed by rate cuts alone."
14 February 2008 © Moneyextra.com
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