Market Round Up

UK

• The ‘Santa Rally’, fuelled by US data, pushed the FTSE over 6,000 at the end of December 2010 and early 2011 should see continued economic recovery
• Recent manufacturing data shows a 16 year high accompanied by increased profit margins in the sector as companies control their cost bases and improve their balance sheets
• Real inflation remains stubbornly high but no increase in interest rates is expected in the short term
• Significant fiscal challenges remain ahead of spending cuts in public services in 2011
• VAT up to 20% but many retailers have yet to pass it on to the customer

US

• Strong gains pushed the S&P 500 return to pre Lehman levels
• Extension of US tax cuts prompted US economists to upgrade 2011 forecasts
• Bloomberg consensus projects real GDP growth of 2.6% in 2011 although some economists estimate this could be as high as 4%
• As in the UK and China, strong manufacturing output signals further expansion
• However, the job market remains weak

 

Europe

• The market is unconvinced the Euro sovereign debt contagion is under control
• A wide range of yields for government debt suggest structural problems remain; 2.6% in Germany to around 12% in Greece!
• Underlying fears may be holding back the advance of the equity markets compared to other global markets, despite good valuations
• Ireland’s credit rating was again downgraded and focus has now moved to Portugal

Asia & Emerging Markets

• China increased interest rates to 5.81% as expected and consumer prices jumped 5.1%
• In common with other developed markets, China’s factory production results were very strong and in addition South Korea, Taiwan and Singapore all had positive output results
• Emerging Market equity valuations are looking less attractive leading to a cooling of investor sentiment
• Oil and commodity prices rose strongly as global recovery gathers pace

Japan

• Institutional investor surveys suggest a reversal in sentiment towards Japan
• Historically Japan has benefitted from cyclical improvements to US economy where there is increased monetary tightening expectations
• The exchange rate has stabilised and valuations look attractive

Fixed Interest

• Investors are generally avoiding any European debt exposure
• Inflation remains the threat to the UK Gilt market and investment managers are preferring high yield debt in relation to investment grade corporate bonds, some of which performed negatively in December
• Expectation of capital preservation and income from this asset class going forward rather than significant capital appreciation
• UK inflation edging higher

Teleconference Feedback

The telephone conference and fund manager investment forums have been rather quiet since the start of the New Year but our diaries are now starting to fill and we will report back on these meetings next month.

Gartmore

As you may have seen in the press, Henderson have announced the terms of their proposed acquisition of Gartmore, which represents the conclusion of Gartmore’s recent strategic review.   Subject to shareholder and regulatory approvals, the deal should complete within three months. Whilst some negotiations remain ongoing, the majority of Gartmore's portfolio managers have already committed to join Henderson which will provide continuity of investment management.

Ultimately the Gartmore funds will move on to the same client service administration system as the Henderson funds. All funds will adopt the Henderson name and the Gartmore brand will be replaced. The integration should be greatly helped by the fact that Gartmore and Henderson use the same third party administrator. This should allow the phase to happen much sooner than would normally be possible. We will provide updates on this as matters develop further.  Apologies for the fact that those holding Gartmore funds will receive further rafts of paper!

Conclusion

May we start the conclusion by wishing you all a Happy New Year! With the freezing weather seemingly gone only to be replaced by continuous rain there is little to cheer about especially as 2011 is likely to be the year when the spending cuts and tax rises are really felt.

Despite this however, equity markets have started the year positively and they continue to be our preferred asset class going forward.

Whilst the economic recovery in the UK will be a subdued affair, no doubt interspersed with occasional bad news, the large corporates are in good shape and have substantial cash reserves so the possibility of M&A activity later in the year looks likely.

Interest rates look to remain on hold for a little while yet although the stubborn inflation has probably hastened the first upward move and this has already impacted on investment grade fixed interest funds.

House prices look set to continue their slide as confidence and demand remains week. This typically has a knock on effect in the high street and retailers, after a difficult Christmas, are likely to find it hard going.

Still – we did win the Ashes!!!!



Date of Next Meeting:  2nd February 2011