Carney Circus Final Act
On 15th March the curtains finally come down on a show that has been running for seven years. The outgoing Governor of the Bank of England, Mark Carney, made much of his legacy of forward guidance in his recent speech. You have to laugh. It wasn’t for nothing that he gained the nickname The Unreliable Boyfriend. Almost every message of guidance he provided throughout his tenancy at The Old Lady was reversed next time around. Forward misguidance would have been a far better description, the content gaining usefulness only as a contra-indicator.
Now, as we approach the end of Carney’s tenure, talk turns once again to interest rates in the wake of weak trade figures. GDP fell by 0.3% in November from the previous month, taking growth for the quarter versus that of the previous year to just 0.9%. The worriers fret that this is the weakest rate of growth since 2012 and call for the Monetary Policy Committee at the Bank to cut interest rates from the current 0.75% to 0.5% again. Rumour has it the Committee, having voted 7 to 2 against a cut at their December meeting, is more evenly split.
Before we all start crying about economic stagnation and the remoaners start blaming Boris, let’s give it some logical consideration. There should really be no surprise at all that these numbers were rotten. The economy was already stagnating as we approached the 31st October Article 50 deadline and this was greatly exacerbated by the advent of the December general election. For months business decisions and investment were put on ice as uncertainty gripped the boardrooms. Can those MPC members really not have noticed the change in the atmosphere since Boris won with a stonking majority. At the very least the stultifying concerns about a potential stitch-up between Corbyn and wee Jimmy Krankie have been wiped away, replaced by the prospect of a pro-business government that is in situ for at least the next five years.
I suspect that, by the time we see the PMI (purchasing managers’ index) figures moving into the new calendar year, they are going to signal a strong increase in business confidence and it shouldn’t be too long before this is reflected in improved GDP figures. It seems to me the wrong time to be cutting interest rates and, should the panel decide to do so, it may not be many months before they are talking about reversing such a decision. By then, though, Mr Carney will have taken up his new role as United Nations Special Envoy for Climate Action and Finance. Plenty to deliver guidance on there methinks!
The recent deal between these two resulted in Bovis acquiring from Galliford their housebuilding interests including the well-known Linden Homes. Unusually the consideration (just over 57 Bovis shares for every Galliford share) was allocated to the shareholders of Galliford rather than the company itself. Just to complicate matters further Bovis then changed its name to Vistry Group. Don’t ask. Me neither.
To Galliford shareholders their new holding in Vistry Group is by far the more valuable investment. The rump Galliford holding now represents an investment in a construction business in which the projects offer very small margins, mostly around 1% – 2%. One can understand why so many of these companies come to grief when a project (they are usually substantial in size) encounters problems. There is not a lot of meat on the bone.
Vistry looks by far the better investment. The country still has a drastic shortage of living accommodation and Vistry is now a major player in the sector. The government wants more houses built. The population needs more houses built. The industry has years of work ahead of it and Vistry is well placed to take advantage of the opportunities. I would certainly retain the Vistry allocations but am not so convinced about Galliford. In fact, selling Galliford and topping up the Vistry holding seems a sensible move.
Russell Dobbs FCSI
Chartered Wealth Manager