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Spending review presents biggest risk to UK economy Go compare with our comparison table

Spending review presents biggest risk to UK economy

21 October 2010 / by Paul Dicken

As further reaction to the coalition government’s spending review is published, an investment strategist calls the review the biggest ‘macro risk’ to the UK economy.

Sterling fell to a six-month low against the Euro in morning trading on 21 October, which analysts put down to a fall in UK retail sales of 0.2 per cent in September, raising the prospects of further central bank economic stimulus to boost the economy.

Currency exchange firm Caxton FX said the Comprehensive Spending Review (CSR), minutes from the recent Bank of England (BoE) monetary policy committee meeting and data all pointed to the predicted ‘stalling recovery’.

Senior analyst at Caxton FX Duncan Higgins said: “The problem for the pound is the consistent speculation about quantitative easing. Any currency that has that prospect hanging over it is likely to underperform.”

Higgins said the different attitudes to the euro and pound correlated with the actions by the European Central Bank and BoE, with the BoE holding out the prospect of further quantitative easing and the ECB considering exit strategies from emergency stimulus measures.

Ted Scott director of UK strategy at F&C Investments said the spending cuts announced by George Osborne on 20 October accounted for 75 per cent of the reduction in the public finance deficit.

Osborne told parliament that the measures to reduce spending in May had brought the UK ‘breathing space in the sovereign debt storm’ while the CSR would bring Britain ‘back from the brink.’

However, Scott said the size of the proposed costs would lead to negative contributions from government to UK economic growth and therefore posed the biggest large-scale risk to the economy.

He said the economic impact would be felt once departments specify how they will spend their reduced budgets.

“With little in the review that is different from expectations, the main question remains whether the economy will be strong enough to withstand the proposed cuts and prevent a relapse into recession.”

Scott said the economy was growing at a rate below that normally associated with a deep recession which reflected the indebtedness of the private sector and the banks reluctance to extend credit.

While the spending review leaves little room for manoeuvre, Scott said the coalition government was under pressure to prevent a credible public finances plan to prevent changes to the government credit rating and increased costs of borrowing.

“The review will satisfy the rating agencies as it has delivered what it promised at the time of the emergency Budget in June. The gilt market’s initial reaction was also one of approval as yields remained low with the benchmark 10 year gilt staying below 3 per cent.”

© Fair Investment Company Ltd

 Product NameISA OptionIncome YieldMore Info
Henderson Strategic Bondyes5.7%More Info >
Income Paid Quarterly. Investing in higher yielding assets which will include most types of fixed interest securities, this fund aims to deliver a quarterly income to investors. See latest fund factsheet for details.
Newton Asian Incomeyes5.43%More Info >
Income Paid Quarterly.The objective of the Sub-Fund is to achieve income together with long-term capital growth predominantly through investments in securities in Asia Pacific ex Japan (including Australia & New Zealand) region. The Sub-Fund may also invest in collective investment schemes. See latest fund factsheet for details.
Newton Higher Incomeyes5.4%More Info >
Income Paid Quarterly. The objective of the Fund is to achieve increasing distributions on a calendar year basis with long term capital growth. The Fund may also invest in collective investment schemes. See latest fund factsheet for details.
Invesco Perpetual Distributionyes4.7%More Info >
Income Paid Monthly. Invesco Perpetual Distribution offers a balance between both income and capital growth through investment in UK based equities and fixed interest securities. See latest fund factsheet for details.
Invesco Perpetual Monthly Income Plusyes4.46%More Info >
Income Paid Monthly. Popular income fund that aims to achieve a high level of income whilst seeking to maximise total return through investing in high yielding corporate and Government bonds, together with UK equities. See latest fund factsheet for details.
Woodford Equity Income Fundyes3.50%More Info >
Our selected partner for investing in Neil Woodford's Equity Income fund is Barclays Stockbrokers, via their INVESTMENT ISA for new ISAs and ISA transfers, or their MARKETMASTER® ACCOUNT for non-ISA investments. Income Paid Quarterly.The fund’s investment objective is to provide investors with long-term appreciation through investing in stocks primarily listed on the UK stock exchanges. Up to 20% may be invested in international companies. The income objective is 10% higher than the FTSE All Share Index yield with an anticipated annual yield of 4.0%.
Newton Global Higher Income yes4.7%More Info >
Income Paid Quarterly. The objective of the Sub-Fund is to achieve increasing annual distributions together with long-term capital growth from investing predominantly in global securities. The Sub-Fund may also invest in collective investment schemes. See latest fund factsheet for details.
Jupiter Merlin Income Portfolioyes3.10%More Info >
Income Paid Quarterly. To achieve a high and rising income with some potential for capital growth by investing predominantly in unit trusts, OEICs, Exchange Traded Funds and other collective investment schemes across several management groups. The underlying funds invest in equities, fixed interest stocks, commodities and property, principally in the UK. See latest fund factsheet for details.
M&G Global Dividendyes3.27%More Info >
Income Paid Quarterly. The Fund aims to deliver a dividend yield above the market average, by investing mainly in a range of global equities. The Fund aims to grow distributions over the long-term whilst also maximising total return (the combination of income and growth of capital). See latest fund factsheet for details.
Kames Strategic Bond yes2.95%More Info >
The primary investment objective is to maximise total return (income plus capital ) by investing in global debt instruments,denominated in any currency, ranging from AAA Government Bonds through to high yield and emerging market corporate bonds. At least 50% of the fund will be invested in sterling and other currency denominated bonds hedged back to sterling. See latest fund factsheet for details.
M&G Optimal Incomeyes2.44%More Info >
Income Paid Twice Yearly.The fund aims to provide a total return to investors based on exposure to optimal income streams in investment markets. The fund invests across a broad range of fixed income assets according to where the fund manager identifies value. See latest fund factsheet for details.
*Current Income Yields are Gross, Variable and Not Guaranteed
**Historic Yield reflects distributions declared over the past 12 months as a percentage of the mid-market price of the fund.
*** This is the target yield the fund aims to achieve per year, it is not guaranteed and could change according to prevailing market conditions. The target yield is net of basic rate tax.
Information correct as at 08/02/2012.

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