Market Round Up
UK
- The FTSE dropped below 6,000 once more after data showed an unexpected slump in the UK economy in the last quarter of 2010, blamed partly on the weather.
- Bank shares in Lloyds and RBS, who are heavily supported by the UK economy, fell amidst calls for stronger controls on the industry. HSBC, who did not receive a bailout, benefited from emerging market exposure with a small rise of 0.1%.
- There was a general loss of confidence in equities towards the end of January, with real fears of inflation being higher than expected. Indices suffered the greatest fall in one day since August 2010.
- There is a perceived need to hold interest rates low for as long as possible, although this brings new problems if inflation continues to rise.
- Mervyn King is still predicting “sustained balanced growth” for the UK, although inflation is expected to rise to between 4 and 5%, twice the original target level.
US
- US businesses have started to hire new workers more aggressively, especially in the service sector.
- The decision taken late last year by the Fed to restart quantitative easing has significantly improved the outlook for US growth.
- Stock markets fell at the end of January in the wake of the Eygptian political unrest with investors taking cover in US Treasury Bonds.
- Crude oil prices and shares in tankers rose with speculation as to whether the Suez Canal will shut as a result of the troubles in Egypt.
Europe
- Consumer sentiment in Germany dropped as inflation rose to 2%, marking the end of a rally for Euroland’s biggest economy.
- Speculation on the Airbus bid led to some mining and financial stocks gaining ground, however retailing fell after news of some poor results, in particular from Swedish fashion retailer H&M.
- Sovereign debts fears linger in the background amidst scepticism about Spain’s intention to toughen up on the banking sector.
Asia & Emerging Markets
- The disruption in supply networks due to political unrest in Egypt are likely to have an impact on commodity prices that could hit the emerging markets especially and trigger fears of inflation.
- Egypt represents just 0.5% of the MSCI Emerging Markets benchmark, but commentators are mindful of the wider impact of events there on food and fuel prices.
- Central banks in the BRIC economies have now tightened their policies, with the commercial banks lending rate increased to by 0.25% to 6.5%, its highest level since 2008.
- Tightening also continues in the Chinese economy with a five year plan revolving around “New Strategic Industries”.
Japan
- The economy remained in positive territory despite the recent downgrading by the ratings agency Standard &Poors.
- The yen remains volatile against all the major currencies, with concerns that the debt ratio would continue to grow.
- However, exports rose 13% in December compared to the previous year, especially to the US, with the Bank of Japan increasing its estimate of real GDP to 3.3% by the end of March, rather than the 2.1% predicted in October 2010.
Fixed Interest
- Safe haven buying has driven the markets towards Bonds and Gold at the end of January.
- With a fall in equities, Bond yields rallied slightly - US Treasury 10 year yields at 3.33% and UK Government 10 year gilt at 3.65%.
- Portuguese bond yields hit an unsustainable level of 7%.
Seminar on 24th January 2011 with James Harries – Fund Manager of the Newton Global Higher Income Fund
- Developed economies, particularly the UK, need several years of tax receipts 4% greater than expenditure just to get back to 2007 Government Debt ratios.
- Despite this he still feels there are good opportunities for higher yielding shares across global and emerging markets.
- They are targeting stocks where valuations look attractive and avoiding companies that are reliant on Government contracts.
- As in the past with this fund, the dividend yield will make up a lot of the return
Conclusion
As usual, there are mixed messages so a careful path has to be trodden. If the last quarter 2010 had been better we think pressure to increase interest rates would have increased markedly but they now look set to stay low until the autumn despite stubbornly high inflation. This inflation is of course imported rather than domestically driven. History tells us that equities are best placed to counter the effects of inflation but sometimes investors will have to hold their nerve!
Don’t forget to make use of any unused ISA allowances because, with tax increases everywhere, it is best to make use of these valuable tax breaks.
Date of Next Meeting: 8th March 2011
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