City Watch: Charles Sylvester on why equities remain in favour with investors

THE main problems affecting the world’s economy have been recognised for some while.

THE main problems affecting the world’s economy have been recognised for some while.

The Middle East is still unpredictable. In Europe, a lasting solution to the eurozone crisis is not yet in sight.

In the US, talks regarding solving the “Fiscal Cliff” (the need to reduce the deficit by the end of the year or see the expiry of certain tax allowances and the implementation of automatic spending reductions) meander on, but generally opinion is that some solution, even if it is fudged, will be found.

And in China, a new government is taking power and may try to edge economic growth above the expected 7.5% over the next year.

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Recent news concerning the UK’s public finances have not been too good, but no worse than expectations. GDP growth projections remain optimistic, although the poor performance of important sectors like North Sea Oil and Finance is impacting on the UK’s growth hopes.

There is also the ongoing problem that the banks may need to make more write-offs before they resume actively lending to small businesses as well as the threat to the UK’s AAA credit rating, which may come under the microscope at some stage in the next 12 months.

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In spite of all the potential problems equities are still very much in favour, particularly those with sound finances and which have the ability to increase dividends.

Whilst profit margins will undoubtedly come under pressure, current ratings appear quite reasonable and dividends are likely to grow further in 2013 and investor’s appetite for income remains.

A rosier economic picture in the second half of next year might also bring about a revival in mergers and acquisitions activity.

: : Charles Sylvester is a stockbroker with Charles Stanley & Co in Ipswich.

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