Market Round Up

UK

• March brought a string of disappointing results from the retail sector especially, with a profit warning from Dixons and several High Street names such as Sainsburys, Laura Ashley and Mothercare reporting weak trading. Retail sales were down 0.8% month on month in February and 2% compared to last year
• Turmoil in the Middle East and spikes in the price of oil had greater impact than the Budget, with the FTSE 100 falling below the 6,000 barrier
• Recovery was stalled once more by the results of the stress tests for Irish banks
• Inflation seems set to stay above the target level of 2%, but the Bank of England yet again resisted pressures to increase interest rates
• There was some good news from ITV, Prudential and Vodaphone, plus an unexpected cut in Corporation Tax rates and a rise in employment in the private sector for the first time in nine months

US

• Events in North Africa, the Middle East and Japan were responsible for trimming the biggest first quarter rally in the S&P 500 in 13 years by 0.1%
• Towards the end of the month optimism returned as attention focused back on the fortunes of the US economy, where unemployment fell by 0.1% to 8.8%. This reinforced the view that recovery here is gaining momentum, with temporary jobs in the service sectors becoming permanent positions
• Consumer sentiment, however, was unsettled by rising fuel and commodity prices, against a fall in home equity. The boost in manufacturing has been insufficient to raise wages just yet
• Ford Motors reported a 19% gain in US sales from March 2010

Europe

• The north/south divide continues with German unemployment falling for the twenty-first month in a row to 7.1%, against 9.9% for the rest of the Eurozone Solid growth in exports of goods and services, strong business confidence continue to make Germany the leading light in Europe
• Portugal by contrast continues to refuse bailout assistance, with the Prime Minister resigning over the debt crisis and his failure to introduce stabilising measures
• Inflation has risen from 2.4% and 2.6%, with interest rates increased by 0.25% to 1.25%, significantly the first rise since 2008
• Ireland is struggling to show that the nation has remedied the problems in the banking system following stress tests that showed a need to raise a further £24bn from four of its banks

 

Asia & Emerging Markets

• Equities in the Asian market (ex Japan) ended March having recovered from the mid March low prompted by the disaster in Japan. Korea was a major contributor with the highest 2010 GDP growth of 6.2% for 8 years
• The Bank of Korea and Reserve Bank of India both increased interest rates by 0.25%
• Emerging Markets index rose by 5.7% versus a decline of 1.2% in the MSCI World Index, largely due to rises in oil prices and outperformance in the Czech Republic, Turkey and Russia
• Commentators suggest that the Emerging Markets are generally “cooling” and exposure should be more selective going forward

Japan

• Following the earthquake and tsunami disaster the expected loss is around 1% to 1.5% of GDP in the spring quarter. The expected pattern of recovery is V shaped, with a sharp fall as GDP drops and a rebound as reconstruction begins
• Traditionally Japan has not depended on overseas finance, so intervention by the Bank of Japan to keep short term interest rates down is anticipated.  Meanwhile the G7 countries have co-ordinated measures to stabilise the Yen
• Investors have been looking to take advantage of opportunities to buy into quality companies at cheap valuations, with a view to strong profit growth when the economy picks up again long term
• Globally there may be less impact, for example, exports to Japan only equate to around 2.5% of total UK exports 

Fixed Interest

• Yields on US, UK and German 10 year government bonds have all increased over the month
• Italian and Spanish 10 year yields both fell
• In the UK we saw a shock fall in inflation to 4%. GDP had a modest upward revision to -0.50% with continued uncertainty about the growth and inflation outlook.
• Whilst a number of inflation linked funds are appearing in the market, commentators suggest that strategic funds remain the most appropriate exposure to this sector

 

Investment Seminar Feedback

House View from Fidelity

• Fidelity’s fixed interest team led by Ian Spreadbury are of the opinion that we still face problems in the economy going forward. They have particular concerns regarding financials and have positioned their fixed interest funds accordingly.  They are forecasting low growth for the sector as a whole, preferring investment in equities.
• They have a positive view on equities and some of their fund managers have taken investment opportunities arising from events in Japan.
• Their view is that inflationary problems in Emerging Market countries will led to a slowdown in growth, but this will be a “cooling” rather than a “meltdown”

Conclusion

Poor retail figures and a surprise reduction in the CPI figure to 4% increase the likelihood that we won’t see an increase in interest rates until the autumn. Whilst the pound is at a twelve month low against the euro it remains strong against the dollar, a major consideration with oil priced in dollars. There is also strong evidence of mortgage debt being repaid with borrowers paying off £7 billion in the last three months of 2010, the 11th consecutive quarter of net repayment. Uncertainty over jobs and the impact of increased prices on the high street are taking their toll with people tightening their belts. All of this means deposit interest rates remain low as the investment markets remain resilient to very mixed news at home and abroad.

The new financial year heralds increased ISA allowances, now £10,680 of which half can be in cash. The sooner you use them the sooner you benefit from tax free returns.

 

Date of Next Meeting:  10th May 2011