November Market Commentary

18th November 2011

Following recent events in World markets, here are our latest thoughts to keep you updated. Overall we feel very comfortable with how our portfolios are positioned, but clearly need markets to move in our favour. When there is uncertainty in markets it can often turn out to be an excellent time to invest assuming you can take a medium term view. If you do want to discuss this with us then please get in touch.

Market view

Markets hate uncertainty and the crisis in the eurozone has driven the markets over the last 6 months. Politicians have looked indecisive and slow to react to the debt crisis. Everyone knows Greece can’t pay its debts. The banks who held this debt have accepted a 50% ‘haircut’ on what is owed and now need to have their balance sheets refinanced. The politicians looked indecisive and a crisis of confidence started to unfold which dragged all global markets lower (with the exception of gold).

There are no quick fixes and concerns are spreading now to Italian debt and France will not be far behind. Once again it’s the banks that will be in the firing line.

Fears started to grow that other countries in Europe would need financial support, and the size of the liquidity needed would create another banking crisis as other countries came under pressure. There was a distinct possibility that this would lead to a rerun of the 2008/9 banking crisis. It finally looks like politicians in Europe have realised the magnitude of the problem and appear to be trying to find a more substantial solution.

Commodity prices were firm until August and whilst they had not followed stock markets down, up until then they experienced their worst month since the crisis in 2008/9. Shares in the sector dropped more in response. They have bounced back in the last 2 months, and we still see real value in some areas. Gold continues to benefit from the crisis in the various currencies.

FTSE 100 was over 6000 at several data points in the last 6 months. From August onwards markets became gripped with fear and the FTSE 100 fell through the 5000 barrier. At the time of writing, the market is taking some comfort from the changes of government in Italy and Greece and the passing of the various austerity packages.

Our core assumptions going forward are:-

• Growth will be very subdued but not a double dip recession.
• Interest rates will be subdued for some time yet. No increases imminent.
• Inflation will pick up but not excessively.
• China and emerging markets will continue to grow but not at the same rate.
• Increased price swings are to be expected.
• Most nations want a weak currency to boost exports.
• Most companies are in better shape than in 2009 (excluding retailing and building).

We are investing your money on a 3 to 5 year view although our tactical calls are very much shorter term. As the markets have been trading in a range, the moves have sometimes looked exaggerated relative to the fundamentals. For example, Gold has risen by nearly 30% this year yet many of the gold mining companies, who are making a clear margin of $1000 an Oz, have fallen by 25%. They have started to recoup with the physical gold price in the last 4 to 6 weeks.

Energy companies have fallen by anything up to one third and are now priced at the same level as when the oil price was $65 a barrel. Oil supply is very tight and remain well supported at over $100 on Brent contract.

Companies in the mining sector fell more than the general market on increased risk of a double dip recession. Rio Tinto fell below £28 in the first week of October and have closed today at over £34.00. During 2009 investors were willing to pay over £40 to own shares in this company. The chairman recently issued a statement to the effect they were not seeing a significant fall in orders and many of their units were working at capacity.

We haven’t been well rewarded for our holdings in these sectors but think over the next 12 months we will make a lot of money in this part of our portfolios.

Markets very often have a stronger last 2 months of the calendar year than the period May to October. We think this year will be no different. The last 6 months have been very difficult in the markets, but we are convinced that we will eventually see some longer term solution to the euro crisis, but as mentioned there isn’t currently a quick answer. Stock and commodity markets will be higher on a 12 month view than they are now. We think the upside in the resources sector is significant.

We remain less keen on Europe, Japan and the USA, although the data coming from the USA is beginning to indicate slightly more positive signs.

IMPORTANT: This publication has been prepared for information purposes only by Carrington Investment Consultants Ltd, an Appointed Representative of Sesame Ltd which is authorised and regulated by the Financial Services Authority. The value of investments can fall as well as rise and past performance is not a guide to the future. Investors may not get back the full amount of their investment. The above commentary represents our current markets advice but does not represent individual advice to buy or sell any investments. We recommend that you contact Carrington Investments for any specific investment advice that you may require.

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