HENDERSON

• With the financial woes persistently on the front pages of the papers, it is easy to get bogged down in dire market sentiment but it is of course an unsettling time for investors.
• Last week in local currency terms key markets such as the Nikkei, Hang Seng, Euro Stoxx and FTSE 100 were down as much as 9% on the week.  The S&P 500 fell by more than 7% in the first four days alone.
• Bill McQuaker of Henderson feels that there is not a great deal of new information that has precipitated the fall; rather a collective loss of confidence.  The active ingredients in the toxic brew have been a weakening of economic data together with a destabilised political environment, all of which has been amplified by the loss of market liquidity that occurs during the holiday season when volumes are low due traders being on holiday.
• In Europe, politicians struggled to agree a coherent strategy to the eurozone debt problems as individual national interests were aired.  This was echoed in the spat between parties in the US over the raising of the debt ceiling.
• So what developments could prevent further market deterioration?  Bill feels that it is important policymakers move to restore confidence so that companies and households are comfortable making the investment decisions that lead to economic growth.
• Markets are in flux but if policyholders can provide reassurance then investors would very likely be reminded that equity market valuations are good and company fundamentals are strong. With markets at current levels there looks to be considerable value in equities and if the positive developments Bill has described above come to pass, he believes this could, with the benefit of hindsight, look like an opportune moment to be gaining exposure to risk assets. 

• European sovereigns are facing very real problems and weaker economic data in the US undoubtedly threatens glob
• al growth.
• They feel that market movements bear all the hallmarks of investor panic rather than a considered assessment of the true prospects for global assets.  They believe that little has changed in the past week other than asset prices.  It appears to be the falls in asset prices that is driving markets at present, rather than fundamentals.  Investors are almost certainly being painfully reminded of the events of 2008.
• Their fund managers do, however, continue to favour selected global risk assets which are valued as attractively as they have been at any time since the end of 2008.
• As a result, from a medium-term perspective, they believe that investors are still being well rewarded for taking risk.  Although earnings growth for companies has slowed, they would need to see extremely poor results from the corporate sector to justify the current pricing in a number of markets.
• Markets very surprised by S&P’s downgrade but they shouldn’t have been.  US has not been worth AAA for some time. To put things in some perspective; an AA+ rating is still a very highly rated grade with very low default risk.
• The ECB has been aggressively buying Italian and Spanish Bonds, possibly 2bn Euros of bonds from the market and as a result there has been a big rally.  The ECB do not regard this as Quantitative Easing but in M&G’s view it is.
• The move does not resolve Europe’s funding problems.  The ECB’s move is based on Italy and Spain getting their budgets sorted so expect lower growth in these economies.

• The Merlin portfolios are relatively cautiously positioned at the moment, having recently increased exposure to Neil
• Woodford’s Income and High Income funds, which favour more defensive sectors such as pharmaceuticals. 
• Gold remains a key holding within the portfolios and cash has been reduced lately.
• Leading economic indicators remain under pressure at a time when many emerging market central banks are raising interest rates in a concerted effort to contain inflation, albeit at the expense of a slowdown in domestic consumption growth.
• The European sovereign debt crisis is also a major concern that investors are rightly worrying about and one which is unlikely to resolve itself soon.
• Mr John Chatfeild- Roberts feels it is difficult times like these that we have to remind ourselves that companies are generally in excellent health.  As an example, two-thirds of the US companies in the S&P 500 have now reported Q2 earnings and 73% of those exceeded analyst expectations. That said, they are understandably making cautious outlook statements to the market.
• Their view is that as always in investment, patience is required, and that volatility in share prices creates opportunities. Their approach remains to try and identify those companies that are likely to do well over the medium to long term and emerge from difficult periods such as these in stronger positions that they entered it.

• The downgrade of US sovereign debt from AAA to AA+ is historic and heavily symbolic of the deteriorating state of US financial conditions, but Threadneedle do not believe the change itself is overly significant. S&P do not determine credit risk, they merely express their opinion. The downgrade is a response to the debt crisis and not a cause.
• They feel the bottom line is that the US treasury market is still very driven by interest rates and not by credit risk.  Default risk in the US is minuscule and in actual fact, the difference between AAA and AA+ is barely measurable.
• With volatility high and growth fears at the forefront, their investment strategies will continue to be driven by economic factors more than by a direct response to S&P’s move.
• They are overweight US dollar relative to most other G4 currency as they expect demand for dollars to rise given its reserve currency and funding status.
• Looking ahead, markets may face greater challenges if one or more of the other rating agencies follow S&P.  If the agencies were to utilise the same framework for assessing other countries, then the position of France and potentially the UK could be called into question.