• The UK stock market rallied in December, only to end the year down again, amidst concerns over the threat of Eurozone downgrades. Any improvements in equity markets into January continue to be tempered by this spectre
• December saw a rise in retail sales of 4.1% compared with December 2010, with mixed results for retailers and a number of big, High Street names, such as Blacks, La Senza, Peacocks and Past Times heading into administration
• Inflation has fallen for the second successive month. According to the National Institute for Economic and Social Research, we are heading back into recession
• On the positive side, John Lewis, a reference point for retailers, reported a record week leading up to Christmas, with sales growth over the period of more than 6%. Debenhams and House of Fraser were among others with positive results
• In the banking sector, Royal Bank of Scotland extended gains by announcing a massive shake up, including 3,500 job losses 

• The US stock market rallied in December and ended in positive territory, although confidence was overshadowed by mixed earnings reports from banks. Citigroup saw a steep drop in profits, whilst Wells Fargo reported a 20% jump in quarterly profit
• Concerns surrounding the European downgrades was essentially dismissed in favour of a better outlook, with the Dow Jones at one point up 0.50%
• US unemployment rate dropped to a two year low of 8.6%. Manufacturing in New York State rose to its highest level in nine months, keeping in line with the trend of modest improvement in US economic data
• Industrial supplies and recreational products were the biggest growth area, whilst JP Morgan led the losses in the stock market, with fourth quarter revenue below market expectation

EUROPE

• Another month dominated by the Eurozone debt crisis, although news that the European Central Bank are introducing 3 year loans was well received
• News that Standard & Poor’s have put the Eurozone on negative watch, with credit rating downgrades for France from AAA to AA, has resulted in mixed fortunes for markets. The subsequent sale of French Treasury Bills did a little to improve European stock markets, as France attempts to shrug off the downgrade
• Talks between Greece and its creditors struggled to reach a satisfactory conclusion with ongoing concerns that the country may still default on its debt
• Stocks rose with better news and outlook from Germany and improved confidence that economic activity there will stabilise in the next six months
• The Euro rose against the Dollar and the Yen, with some cause for optimism

• Despite concerns that Beijing are not taking sufficient steps to ease monetary controls, markets in China responded positively to lower inflation and have produced positive news going into January
• The Chinese economy grew by 8.9% on the year in the fourth quarter and a decline in the value of the yen boosted exports
• Markets in Asia responded well to the sale of French, Spanish and Italian Bonds to the European Central Bank, taking this as a sign that Europe was putting its house in order and there would be no demand for further bailout
• Taiwan, the Philippines and Thailand registered gains due to their ability to keep inflation down
• India continues to struggle with slowing growth and high inflation
• Emerging Asia proved a regional winner on performance, whilst concerns over the Eurozone continue to weigh on Emerging Europe. Russia was also dragged down by political tensions

• The Japanese equity market remained broadly unchanged, despite the economy beginning to feel the impact of the Thai floods
• There were gains generally in the property sector in Japan, however in other sectors of the market, such as resources, Japanese companies fared worse than their Chinese counterparts
• Technology and energy shares advanced, including Yahoo Japan and Tokyo Electric Power
• Political tensions between South & North Korea become a possibility following the death last year of the North Korean leader, with speculation about how long the new regime will last
• The Japanese Prime Minister sought support for increased taxes in order to reign in public debt as a result of the Tsunami. He faced a political backlash from the mayor of Japan’s third city, Osaka

• The flow from Equities into Bonds continued from 2011 into 2012, with investors still looking for less risk
• Government Bond yields are at an all time low, although much “fear and distress” is already priced in, along with the expectation of low growth and higher than average inflation
• High Yield bonds are attractive and cheap, but with continuing downgrades, it is important for fund managers to look at bonds with shorter terms to maturity
• Corporate debt is not immune from underperformance, but spreads indicate good value. Companies have spent much time sorting out their balance sheets and deleveraging, as a result of which Investment Grade bonds offer better potential than sovereign debt, with average yields around 5%
• The UK is the best of a bad bunch in terms of sovereign debt and not expected to default, which could lead to huge inflows into gilts, especially from overseas investors. However the risks associated with gilts have changed so much since early this century, that we could see higher prices without an increase in yield
• Whilst Emerging debt is becoming more attractive with improved credit quality, this is still open to inflationary pressures. The importance of “credit risk” and duration are now paramount to the Fixed Interest investor

• This time last year the market was expecting a total return of 4%-5% for the UK Commercial Property sector
• The sector surprised the pessimists by posting a total return of around 8%. Values rose marginally at just under 2% and the income component was a total of 6.3%
• The year has started again with lots of negative sentiment surrounding the commercial property sector, as there are persistent negative uncertainties from around the UK economy and particularly the government’s effect on the UK austerity programme
• Commercial property rent and rental growth generally tracks GDP.  As GDP is going to be low, rental growth is “off the menu” for the medium term
• Threadneedle feel that the resilience of returns last year may be explained by having a properly independently valued portfolio. The person valuing makes an allowances across the board for the fact that tenants could leave and that means there is a very conservative basis of valuation which is also bolstered by a higher income return on the sector.  This is often overlooked but Threadneedle believe this is the single factor behind the resilience the sector showed last year even with leases expiries and tenant defaults occurring
• Commercial property remains a widely diversified asset and is an excellent hedge against inflation

• The fixed interest market has benefitted from outflows of risk assets, but Fidelity’s view is that there are still turbulent times ahead and there are as many opportunities as risks for fixed interest fund managers
• Fidelity’s view is that sovereign risks continue and we are a long way from solving the sovereign problems as although there have been political changes, closer fiscal union is required
• Although the US is starting to show signs of recovery, a sustained global recovery remains very fragile
• We have seen recent sovereign downgrades and we should get used to this as Fidelity think there will be more in the future
• The UK shouldn’t be smug as their status of “safe haven” may be at risk as ratings come under pressure.  This is not a risk of default but debt has to reduce
• Corporate fundamentals are still strong and corporate bonds represent a good source of yield as they are in better shape than sovereigns
• Fidelity would have expected to see an increase in yields on the back of better than expected economic data released but yields have fallen. This has been due to investor sentiment rather than fundamentals and this has caused gaps in valuations
• High yield sector offering greater yields than pre-crisis levels, but investor is taking more risk and provided choice is selected carefully, this sector can provide attractive opportunities
• We should not assume all credit is bad – value in investment grade credit, attractive valuations and good fundamentals.  High yield provide attractive yield but have to accept greater volatility
• Inflation linked bonds provide a good hedge against tail risk inflation.  Fundamentals are improving for emerging market debt, but inflation remains a problem
• Central banks have moved from “inflation fighters” to focus on growth. Debt has been transferred from the banks to the sovereigns and the banks are now in better shape
• Inflationary expectations have fallen, but tail risks such as easy money or loose monetary policy remain 
• The combination of falling growth expectations and inflation has seen a rapid fall in gilt yields, which are now at all time low levels and in Fidelity’s opinion look expensive