Tuesday, February 26, 2008
Bank deputy warns of 'huge liquidity crisis'
Deputy Bank of England Governor Rachel Lomax today warned of slowing growth and sharply rising inflation.
Painting a bleak picture of the global economy, Lomax said the outlook has 'changed dramatically' in recent months because of the credit crunch and the soaring cost of energy and food.
'There have been financial and banking crises before, but not on the present global scale,' she told the Institute of Economic Affairs in Westminster. 'This must surely be the largest-ever peacetime liquidity crisis.'
Lomax said the 'accident waiting to happen' in US subprime mortgages and the wider credit markets 'lends itself to a wide range of predictions about the possible course of events from now on, from the relatively benign to the frankly apocalyptic'.
She said that UK inflation will 'rise sharply in the near term' while the economy will grow 'at below-trend rates over the next two years' even if the Bank cuts interest rates dramatically. This highlights the MPC's dilemma as it tries to balance the risk of runaway inflation with the need to boost economic growth.
Lomax, in charge of monetary policy at Threadneedle Street, said: 'A temporary pick-up in inflation, by itself, does not mean the committee needs to tolerate a significant weakening in demand.
'But if inflation expectations appear to be persistently elevated, the committee will need to tolerate more slack to keep inflation on target. And that means it will have less scope to respond to slowing demand - the risk posed by the current turmoil in financial markets.'
Share tips: Top stock picks for 2008
An equity sell-off in March, the collapse of the US subprime market and the ensuing credit crunch were hardly factors to inspire investors in 2007.
The past 12 months have not been easy for stock markets and the problems are not over. Experts expect the market woes to continue well into 2008 - concerns regarding the full extent of credit writedowns are likely to weigh heavily on shares, particularly for the first six months of the year.
'Global markets will be hoping that the US can avoid falling into recession, whilst in the UK the economic outlook remains balanced on a knife edge,' says Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers.
But this shouldn't mean there will not be opportunities for investors - they will however have to be extra vigilant. Morgan Stanley, one of the world's largest investment banks believes in a worst case scenario, the FTSE 100 could plummet to 5350 by the end of next year. Hunter, on the other hand, thinks it could hit 6900.
Companies with good growth prospects and strong balance sheets should continue to outperform in 2008 as should large-caps according to Morgan Stanley. Elsewhere, experts believe that given continued market volatility, there will most likely be a retreat to defensive shares.
So in light of these factors what stocks are the experts tipping for 2008?
Despite its recent difficulties in the production and refining areas which ultimately had a negative impact on its profits for the latest quarter of the year, Richard Hunter at Hargreaves Lansdown rates BP.
He says: 'The recent oil price highs should underpin performance, along with the resumption of projects such as the Gulf of Mexico, Thunder Horse and, in the foreseeable future, the Texas refinery, which should return to full capacity.
'The challenges may not be over, but at least the rot seems to have been stopped. The shares appear to have weathered the worst of the storm, and now stand up 10% over the last six months. While the market is well aware that there is still much work to be done, the current consensus is positive.'
The retailer is a hotly tipped stock for next year. Hunter rates it, as does Morgan Stanley and Justin Urquhart Stewart of Seven Investment Management. He says: 'Tesco is one to watch. It is greatly improving its overseas business in the Far East, Eastern Europe and in the US. 2008 could in fact witness up to 50% of its profits coming from abroad.'
Hunter adds: 'Without taking its eyes off the core UK market, where all the key performance indicators continue their inexorable growth, the success of its international division continues apace, with a flagship Chinese store and the US roll-out yet to make their own notable contributions.
'The recent doubling of the share buyback programme to £3bn will add further support to the shares, while on past performance the Christmas period could give yet another boost to prospects. And, despite a 24% hike in the share price over the past year, the market view towards the shares remains resolutely positive.'