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Going down but not out

The UK stockmarket remains remarkably resilient, with pharma stocks as popular as ever, as the country faces significant challenges at home and abroad

DownThe UK stockmarket remains remarkably resilient, with pharma stocks as popular as ever, as the country faces significant challenges at home and abroad.

The Bank of England's monetary policy committee must be tied up in knots at the moment.  They have kept minimum lending rate at 0.5 per cent – a 365-year record low point – for one of the longest periods during which interest rates have remained on hold.

They are tied up in knots because they need to deal with two opposite forces: one is that UK inflation is 4 5 per cent and rising – since the Bank of England was unchained nearly two decades ago by the then Chancellor Gordon Brown, the Bank has been given the responsibility of keeping UK inflation at under 2.5 per cent; the other force is the health of the economy. We have seen off one recession, and we are poised to fall into another recession despite record low interest rates.

The UK economy is torpidly moving sideways with GDP showing no growth. Unemployment is hitting 2.5 million; British workers left in jobs have seen their 'feel good' factor collapse as job insecurity and falling property prices take their toll.  In addition, a number of countries around the Mediterranean – plus Ireland –are basket-case economies needing huge injections of cash to move out of bankruptcy. The arrest of the Chairman of the International Monetary Fund, Dominique Strauss-Kahn on alleged charges of sexual assault has been enough to put Greece's rescue package devised by the IMF on hold and its credit rating cut causing alarm in the financial community and tremors in the global market.

The burden of being forced to lend to other indebted economies in Europe is weighing heavy on the UK's existing £1trn deficit. Added to this we are also fighting a war on two fronts – Libya and Afghanistan. It is little wonder then that the global economic system is poised to lower the UK's credit rating to a point at which it will be very much harder for the government to raise fresh cash on the market at the existing rate of interest. As ever, UK taxpayers will have to foot the bill.

Despite all this the UK stockmarket has remained surprisingly resilient, with investors seeking safety along with income. The safest sectors are food and pharmaceuticals. The food industry is aggressively competitive so profit margins are ground down to the bone. While the pharma industry sector is by far and away the best bet with high dividend yields on offer allied with massive cash generation powers in addition to treasure chests stacked with cash: cash that could be earmarked for still higher dividends, massive share buy backs or for astute acquisitions to bolster drug portfolios nearing the end of their patent protection.

Dealers are looking forward to a possible bid for Shire Pharmaceuticals with AstraZeneca in the frame as a possible bidder. If such a bid were to be launched, we would swiftly see a higher bid coming from the major pharmaceuticals overseas, with Novartis being the name in the frame.

The Author
Malcolm Craig
is a freelance financial journalist and author of 15 books on a wide sector of investment markets ranging from shares to gold, from the money markets to gilts. He is one of the country's most respected investment commentators.

17th May 2011

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