February 2010

The UK “limps” out of recession ending the longest and deepest recession since the Second World War
The UK has finished last in the race to exit the recession half a year behind Germany and France. This indicates the state of an extremely fragile recovery, which has been heavily reliant on support from fiscal and monetary policy.
Some commentators estimate that it will be three years before the UK returns to the level of output achieved in 2007 and as a result the Bank Of England are likely to keep interest rates on hold, at least until there is some evidence of the recovery gaining pace.
As the UK is particularly prone to double-dip recessions, an early tightening of monetary policy could easily push the UK back into recession.

Although there are still concerns regarding high debt levels, sentiment is starting to improve with the market benefiting from better than expected corporate news. Retail spending rose receiving a boost from strong sales in the lead up to Christmas.
An increase in business expansion was larger than expected on the back of new orders and Government incentives.
Rising oil and commodity prices fuelled rallies in basic materials companies such as metals and petroleum producers.
The number of sectors enjoying good performance has broadened. Utilities, telecoms, IT and consumer discretionary all posted good gains

Europe

Equity market weakness was led by the Greek Banks, five of which saw credit downgrades over the worsening debt situation in Greece. This raised fears of the situation spreading to other regions with high debt levels such as Spain, but Abu Dhabi’s rather belated move to back Dubai’s world debt obligations help to disperse worries over Government debt for the time being.
Markets gained momentum after the EU Government heads indicated the stimulus measures would remain in place until the recovery had fully established itself.

Asia & Emerging Markets

After a slow start, Asian markets rallied, reacting well to positive economic news from China where industrial production rose by more than anticipated in November.
The upturn in momentum was fuelled by evidence of growing demand and higher prices for commodities such as oil and copper as well as for computer memory chips.
The gains recorded at the end of December pushed Asian stocks to their strongest annual gain since 2003.

Japan

Japanese stocks have been playing catch up outperforming a number of other major markets.
The market appeared focused on external developments and stocks jumped on the back of a bout of Yen weakness which particularly benefited exporters.
The Japanese market also participated in the global rally following the resolution to Dubai World’s outstanding debt payment in mid-December.

Fixed Interest

Disappointing GDP data boosted gilt performance, however the uncertainty surrounding the outcome of the General Election points to a bumpy ride for gilts during the next six months. Looking ahead, higher inflation, positive growth and high levels of supply will all lead to uncertainty for gilts.
While investment grade corporate bonds outperformed government bonds, their performance was still rather weak. However, both government and corporate bonds outperformed the index-linked sector.
High Yield Bonds had another good month.

Teleconference 12th January 2010 with Neil Woodford
Manager of the Invesco Perpetual Income and High Income Funds

Neil’s view is that although the UK economy is through the intense crisis we are “not out of the woods yet”.
He thinks there are difficult fiscal challenges ahead and a tough budget and that it is wrong to under-estimate the challenge ahead. Whichever party is elected will face tough decisions and failure to address the deficit in the UK economy could have a significant impact upon the market.
Although it is important to recognise that economic conditions will remain tough, Neil believes that there are still attractive investment opportunities. He is confident that he has the right strategy for his funds taking a 3 to 5 year time horizon and despite being cautious about macro economic conditions, he is optimistic for the outlook of his funds and that the stocks within the portfolios will continue to deliver attractive dividends.

Meeting on 19th January 2010
Jason Pidcock – Manager of Newton Asian Income

Current yield on the fund is 4.6%, which has grown every year.
50 holdings in the fund
Jason forecasts that it will be a stock pickers year
UK elections have come at the right time as the new government can slow government spending
Australia proving a strong economy with stronger business links to China, Japan, Korea and India than it does to the US.

New Star International Property Fund

Henderson New Star has announced that the International Property Fund will re-open on Friday 12th February 2010 allowing shares in the fund to be bought and sold in the usual way.
The unprecedented negative sentiment towards commercial property brought on by the impact of the credit crisis, combined with large withdrawals from institutional investors, led New Star to suspend dealing in the fund in order to protect the interest of investors. Since that time Henderson New Star has sold a number of properties which has raised the liquidity of the fund to a level that they are confident will allow the fund to reopen. In addition, wide scale changes have been made within the fund management team and the way that the fund’s liquidity is managed.
The New Star International Property fund was one of our preferred funds and had been performing well in its sector. However, due to the withdrawal of funds to institutional investors the fund was “robbed of its cash” which, in our opinion, should not have been allowed to happen by the management at New Star.
Given the safeguards now put in place by Henderson New Star and as we are seeing an improvement in sentiment for investment in commercial property, it is our recommendation that clients remain invested in the fund and we will continue to monitor progress.

It is increasingly difficult to be confident about the short term outlook for UK markets as economic news is still mixed and we still have to wait and see what the Chancellor has in store for us with regard to tax rises and cuts in public spending. The strong figures from China confirm our feelings that recovery in the Far East will be the strongest and that global, as opposed to UK equities, will play an increasing role in portfolios.

Date of Next Meeting: 9th March 2010