I first started to coming to London in 1995 when I broke into fund management with a British partner. I always loved London, easily my favorite city in the world. To this day, I'm still amazed by this amazing city's glitter, the buzz around the busiest streets and restaurants and the incredible history.
London is also very expensive. To live here, Ive always thought Londoners were all millionnaires. But that's not the case. Many people with jobs here flock to the city in the morning and actually live outside of London where real estate prices and the cost of living are much more affordable.
From a global perspective, I've always found the pound excesssively valued. I still don't understand why the British pound trades where it does because the economy isn't booming, budget and trade deficits are bulging and the cost of living in London has gone from outrageous to utterly crazy. But here you are: The pound is #1 in the world in 2006 versus the dollar, euro and the yen. It almost takes 2 dollars to buy one pound today compared to about 1.55 ten years ago. But one interesting conclusion is that although most European bourses have leapt over 15-20% this year in local currency terms, the London FTSE-100 is up just 10%. I think London is lagging for several reasons, mainly high interest rates, a strong pound and sluggish growth.
But where there's lethargy lies opportunity.
The London FTSE, or Footsie Index, offers some of the highest-yielding bank stocks. And as interest rates eventually peak for this economic cycle in 2007, I'm going to start moving in and making some purchases. Many U.K. banks now yield in excess of 4% and a few yield over 6% in sterling. I think there's a fair chance that interest rates will drop here next year coupled with a softening, but not a crashing, British pound. Falling rates imply a rising stock-market and especially, a rally for interest rate sensitive sectors like financial services.
In a world marked by general hysteria and poor valuations, London is almost an oasis of relative and absolute high-value.
Look for a high-yielding bank stock in my Sovereign Individual investment plug in January.
