Simon Marsh: Why I'm watching out for the re-emergence of manufacturing

Killik & Co's partner Simon Marsh writes:

The state of the UK economy has been well documented in recent weeks and it will be of no surprise to anyone that we face formidable challenges as we enter a new decade.

In the wake of the recent pre-Budget Report, it is now apparent the government will have to borrow a staggering £243 billion by the end of the current financial year and the national debt, which currently stands at £830 billion, is expected by the government’s own admission to increase to £1.5 trillion by 2014/15.

Worse still, the Institute of Fiscal Studies estimates that this debt burden will not peak until 2032, at which point it will have ballooned to £1.8 trillion – representing some £30,000 per head.

This unenviable position has not been lost on financial markets and here the credit default swap market that is used to insure debt provides an interesting perspective on the UK’s standing in the world. While two years ago it cost $5,000 (£3,000) a year to insure $10 million of UK government debt against default for five years, it now cost $82,000 to buy the same insurance.

That is more than the equivalent insurance for Chilean government debt ($69,000) and considerably more than a host of global corporations such as McDonald’s Corp ($38,000) and IBM ($32,000).

In essence, the market is saying that UK plc is now less creditworthy than either the government of Chile, McDonald’s or IBM.

Take nothing for granted

So what does this mean for UK investors this year and beyond?

First that the so-called risk-free return available on gilts should not be taken for granted and, while the odds remain against a full-blown sterling crisis, it nonetheless remains a possibility particularly in the event of a hung parliament following the general election.