Investment Market Update

10th March 2010

This is our first market commentary for 2010, it shares some interesting figures and statistics, as well as thoughts about the impact of the upcoming election. Its always our intention to keep you updated of market developments and we hope you will take the time to read it.

World Markets

World equity markets advanced as a whole during February, although underlying performance was mixed. Investors remained cautious and risk aversion was evident amid worries about Greece’s fiscal problems and mixed economic data from the US.

Some European countries experienced a torrid month. Greece took centre stage during February as the country struggled to tackle the largest budget deficit in the eurozone. As one report highlighted, Greece has a population of over 11 million but only 6 (Yes 6!) have a taxable income of more that 1million euros per year. One wonders what happened to all those Greek shipping magnates! News of Greece’s plight prompted economist to re-examine other countries with sizeable budget deficits – notably Spain, Portugal and Ireland – raising concerns that their predicament could hamper the global economic recovery. Meanwhile, confidence in the eurozone dipped unexpectedly as economic data pointed to growth in the region all but stagnating during the fourth quarter.

UK Markets

In the UK, investors were buoyed by generally positive earnings data from leading banks and mining companies, and by the news that economic growth for the fourth quarter of 2009 had been revised up from an initial estimate of 0.1% to 0.3%. Meanwhile, consumer spending posted its fasted increase since the first quarter of 2008. On the negative side the rate of inflation soared to 3.5% during January – well ahead of the Bank of England’s ongoing 2% target – as VAT returned to its usual level of 17.5%. Many fund managers believe that inflation will remain in these regions for a few months to come. The UK’s budget deficit continues to pose a substantial problem for the Government; nevertheless, the Bank’s governor Mervyn King still believes the UK is unlikely to lose its top credit rating.

The main issue faced by the UK market is the build up to the forthcoming election and the prospect of the UK having a hung parliament. The sentiment towards this prospect is very negative but my co-director Nicky Owen attended a seminar last week given by M & G where Richard Woolnough, one of their top fund managers commented that it really depended on how ‘hung’ the hung parliament turned out to be. He explained that even in this situation decisions may still be made for the general good of the economy rather than for political point scoring. Nevertherless another by-product of this spectra has been a significant weakening in sterling which had lead to speculation as to whether or not the UK will be downrated. The pound reached a nine-month low against the US dollar towards the end of the month. Speculation that ratings agencies are set to downgrade Greece’s debt rating fuelled fears the UK might have difficulty in coping with its own soaring budget deficit. However, Mervyn King, the governor of the Bank of England, said he would be “immensely surprised” if the UK were to lose its top AAA credit rating.

UK economic growth for the fourth quarter of 2009 was revised upwards from an initial estimate of 0.1% to 0.3%. Throughout the recent recession – the most severe on record for the UK – the UK economy contracted by 6.2% since the first quarter of 2008. The Bank of England reduced its forecast for UK economic growth in 2010 from 2.2% to 1.4%.

Equity prices advanced in the US, boosted by encouraging corporate earnings announcements. Investors were heartened by strengthening retail sales data and an unexpected drop in the rate of unemployment, but consumer confidence registered a surprise drop. The US economy expanded by 5.9% during the fourth quarter of 2009, and retail sales posted a faster-than-expected increase. Of the 456 companies in the S&P 500 Index that have reported fourth-quarter earnings since 11 January, three-quarters announced profits that exceeded consensus forecasts.

Your Personal Situation

I hope this was of some interest to you and as always, please let us know if there have been any changes to your personal circumstances since we last spoke, so that we can review your investments and make sure they are allocated correctly.

Yours sincerely,

Mike Hodges
Director

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