Investment Market Commentary

7th September 2009

As I write this newsletter it is difficult to find some real confidence behind what has happened to global stockmarkets in the last few weeks as they have continued to rise. Any type of good news is being focussed on whereas negatives seem to be largely ignored, it is fair to say that any recovery we have seen is fragile and does not contain substance.

The last time that I wrote a commentary in May most of the news was negative, but this has changed, albeit for the moment. Shares have hit 2009 highs in the last few days, having struggled during the quarter and taken off about 3 / 4 weeks ago. The main reason is there is a high expectation that the worst is over and confidence has returned. The big news has been around the Banks who announced their first half results recently. All of them made encouraging noises about the conditions improving and Barclays and HSBC made healthy profits. The profits in the Banks have mainly been due to the Investment Banking divisions doing very well, which has raised the very popular subject of bonus levels for bank employees. This will be especially grating for those banks that the Government helped out and now effectively own.

As well as the Banks announcing results, we have seen car sales rise for the first time in more than a year and also encouraging surveys from Manufacturing, construction and service industries. House prices have risen for the third consecutive month.  Having digested all this, the Bank of England then issued a statement about the fragility of the UK economy and unexpectedly announced a large expansion in its quantitative easing policy. This could well have been prompted by worse than expected Q2 GDP figures which came as a surprise. This however, seems in the short term to have been ignored by investors as they focus on positives. One reason could be that it is almost certain that interest rates will remain low and I cannot see this changing until well into 2010, and investors are looking elsewhere other than cash in order to provide a return. There have been big inflows into Corporate Bonds, in the last few months and which I advised to buy back in January of this year. The average yield on a Corporate Bond fund is about 5.5%, which looks very attractive compared to cash. Corporate Bonds have risen in capital terms by an average of 11% over the last 6 months and this rally probably still has some life in it yet. So, it is probable that investors are looking for alternative investments to cash and that has helped drive markets up.

In the States economic data continues to paint a mixed picture. The index of leading economic indicators increased in June for the third straight month. This index indicates the prospects for the next 6 to 9 months, which suggests the recession may be drawing to an end. Having said that the unemployment rate continued to rise, reaching 9.5% in June, the highest in nearly 26 years. GDP has contracted at a slower than expected rate for the second quarter of 2009, this was put down to an increase in Government spending. The main private sector sources of demand, including exports, actually declined and consumer spending data was worse than expected. So a mixed bag from the States, but there is more positive feeling than a few months ago and a recovery could be under way, although with several obstacles to get over first.

In Europe, Economic indicators continued to improve and led to equities surging in the last month, on the hope that the worst is over and a recovery can happen. The Economic Sentiment index for the eurozone rose further in July, which is the fourth consecutive increase, industrial output also increased. Meanwhile, annual inflation dropped by a surprising 0.6% from a year earlier. The reason for this was energy prices, which have declined over the last year, unemployment also rose to its highest level since 1999.

In the Asia Pacific region GDP growth was very positive in the second quarter of 2009. The Chinese economy recorded an annualised growth of 7.9% for the three month period to the end of June, compared to 6.1% in the previous quarter. Equities in the region posted double digit gains for July driven by upbeat corporate reports and economic data which all showed signs of recovery. After a 9 month Government imposed hiatus due to plunging share prices, regulators lifted the ban on Initial Public Offerings in China, as markets recovered. The successful re opening of IPO activity reflects growing investor confidence that the Chinese economy will recover much faster than elsewhere.

Future Strategy

I remain cautious about the reasons for the recent increase in equity markets and feel that they are probably ahead of themselves. Having been through the worst financial crisis for more than 70 years, we are not going to go into recovery overnight. I would not be surprised to see a mini dip in equity markets over the next couple of months as markets get nervous again about the sustainability of recovery.

A lot of clients are still heavily weighted into Cash and this should be reviewed and you should look at alternative investments, especially as we predict interest rates to remain at current levels until well into 2010. The Corporate Bond Market which I advised clients to increase holdings in at the start of the year has performed very strongly and it is likely that there is still some shelf life left in this market. I would advise you to get in contact with us regarding re aligning your portfolio.

As far as equities are concerned they will come good, but there could be another fall first. It is likely over the next few years that we will enter an inflationary phase brought on by the actions of Governments to get us out of the current financial mess. This is likely to produce strong equity growth and having your investments set up to take advantage of this will be crucial.

Market Statistics

If you have any questions or comments please contact us on 020 7324 6030.

Mike Hodges
Director

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