UK housing market out of control?

House price inflation of 15% in 2007 could cause a bubble. UK house prices are currently affordable, but the Bank of England may have missed the chance to avoid a bubble. Mortgage approvals data, out today, confirmed the strength of the housing market. House price inflation is likely to stay in the low double digits this year. But with interest rates on the rise, house prices are on their way to become overvalued by early 2008.

Outlook 2007: Another Good Year For Equities?

While Prometheus is more circumspect about the prospects for markets than many pundits, a re-rating of global equities is possible this year enabling shares to post solid returns.

A rise in P/E ratios is possible in 2007 as the Fed embarks on monetary easing in response to slower U.S. economic growth. History indicates that a rise in P/E multiples may more than offset a modest deceleration in earnings growth to keep the equity bull market on track. Moreover, equity valuations look highly compelling relative to bond yields, which could induce investors to switch into shares if a soft landing scenario for the global economy pans out. Scope for a re-rating is greatest in the emerging markets. Bottom line: Stay cyclically upbeat on global equities.

Globalisation and technology reforms should keep a lid on inflation.

There are two main forces acting to hold global inflation down. The first is the dramatic expansion of the free market system in the past 10-15 years, which has led to an explosion of the global labour force and a once-in-a- lifetime upward shift in global manufacturing capacity. The increased supply of high quality manufactured goods has put downward pressure on global goods prices. The second force for disinflation is the application of new technologies in the developed world, along with continued market reforms and deregulation. This shows up in strong growth in productivity and corporate profits.

Also, rising debt levels do not herald an Armageddon scenario playing out anytime in the foreseeable future.

Abundant liquidity and a generally positive economic environment are feeding financial risk taking, which many investors fear is being taken to an excessive level. Moreover, this is occurring when debt levels in the U.S. and elsewhere are at historical peaks. BCA has termed the ongoing leveraging of the financial system as the Debt Supercycle. Though it is legitimate to ask when this leveraging might end, they argue it can be sustained as long as authorities have the policy tools available to reflate demand and boost financial liquidity. There is no sign that we have reached the limits of indebtedness in the U.S. or elsewhere, and the Fed in particular has ample scope to cut rates if a reflationary impulse were needed. Bottom line: Both disinflationary forces are structural, not cyclical and will persist, which underpins optimism about the inflation outlook. The imminent end to the Debt Supercycle is not a major risk for investors.

And finally…………………..

INEVERYOFFICE

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.