Morgan Stanley Details Why The UK Is About To Enter A Period Of "Stagnation"

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While the UK jumped quickly, and early, to the side of austerity, it is now facing some domestic blow back based on rising inflation and an economy peaking too soon, according to Morgan Stanley’s Graham Secker.

There are four key reasons for investors to be cautious now, according to Secker:

  • Leading economic indicators appear to be near their peak
  • The Bank of England will probably hike rates in H2 2011; the ECB looks likely to hike rates this week
  • Inflation is now threatening the country’s consumer, and broader economy
  • Instability in the Middle East could still send oil prices higher

Secker doesn’t think it’s time to get out of the UK, however, and says equities, preferably those offering a dividend, remain the best place to be in the market. It is going to be a slow period, however.

From Graham Secker:

When we consider all of the above issues, we believe the most likely outcome for equities over the next 3-6 months is a period of stagnation, albeit with a reasonable degree of volatility in the interim. At this time we do not see scope for a double-digit drop in stocks from current levels, nor do we envisage markets breaking out to material new highs.

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