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16 Jan, 2008

Published: 08:23 Wednesday 16 January 2008
By: David Campbell, Investment Reporter

Inflation is now the core threat to the UK economy and the chance that it will drive the country into recession is above 50%, Nick Clay of the Newton Managed fund has warned.

'We feel that there is a high likelihood of recession, over the odds. At the moment we are inclined to think that this would be a technical rather than full-blown recession,' said Citywire AAA-rated Clay. (Newton Managed)

'What would change that is inflation. It is currently very stubborn and if not controlled quickly it is going to blow and it will be out of the hands of the central banks.'

Both food pricing and power have caused concern he added. Energy supplier EDF yesterday announced that it would be raising domestic gas prices 10% at the end of the week and electricity prices more than 6%.

'The key will be whether this feeds through to wage inflation. We have already seen some unions submitting 7% pay demands.

The problem was exacerbated by interest rates decoupling from risk pricing following the credit crunch he added.

He added that what was bad for households was not necessarily bad for the world or for investors he added, with successful inflation plays being available in resources and resource-producing regions such as the middle east.

He picked United Arab Emirates property company Aldar as a good pick to take advantage of free-flowing cash in the middle east, alongside structural choices such as Indian wind turbine producer Suzlon, as energy costs boosted alternative generation.

Clay returned 16.3% to investors during 2007 against a LCI UK & International Equity benchmark of 6.2%.

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