EUROPE

• Weakness in Southern Europe is likely to continue for some time and greater fiscal tightening in Spain, Portugal, Italy and Greece will adversely affect demand with greater uncertainty over the Euro.
• However, with them in receipt of less than 14% of Eurozone exports and making up less than 18% of Eurozone GDP, the impact may not be as great as some fear.
• Germany will lead the way in cutting spending and increasing taxes to reduce deficits. Fortunately the manufacturing industries are such that production is not just linked to domestic demand – for example, car components. The main concern is that unless the level of support required to rescue Greece is kept in check, the effect on global GDP could be more pronounced.

US

• The US economy has suffered some setbacks in the last month with the events surrounding the Louisiana oil spill and further investigations into the credit rating of banks.
• The US dollar strength against the Euro, has made the export position uncertain.
• Despite some job creation earlier in the year, growing numbers continue the search for work. Markets have lost some of the ground they gained, indicating a slowing down for the remainder of the year.

FAR EAST

• The weakness of the Euro will present competition for the exporters of emerging Asia and markets generally have been undermined by global risk aversion.
• This comes as the Chinese economy is also slowing down. Worst performer was the Shangei index, although some of the Asian regions remained positive.
• Australian mining stocks continue to be impacted by the planned super-tax on profits and change in government following a drop in support of the ruling Labour party. 

JAPAN       

• The G20 summit is calling for member countries to cut deficit and improve GDP by 2016. Japan is an exception to this as it can finance its debts from domestic sources and an expanding economy.
• Government measures are being put in place to encourage business lending and reduce corporation taxes to stimulate growth.  The region, however, has still been affected to some extent by general global risk aversion.  

FIXED INTEREST

• The flavour of the month, especially gilts as a flight to safety, with many anticipating a double dip (that not everyone is convinced will happen.)
• Yields are around 3 – 3.6% on corporate bonds, therefore still ahead of inflation and more towards the “normal” range regarded as a sign of low if consistent growth.

Investment Seminar Feedback

Teleconference with First State to ascertain the factors which have lead to the dip in performance of their Asia Pacific Leaders fund over the last year compared to their peers.

• The fund management team continue to be “stockpickers” and although they believe the long term outlook for the region is still attractive, they had concerns in the short term, such as the bank lending in China.
• They adopted a cautious approach and the fund was positioned defensively with a holding in gold as “insurance” against bank lending problems and/or inflation.
• It transpired that banks did well but as the fund was underweight in this particular sector, it missed this outperformance.
• Some of the best performing stocks were not held in the fund as these did not meet the management team’s strict quality criteria and they were not prepared to buy “trash” just to chase performance and make their short term performance more attractive.
• The fund management team are maintaining their cautious strategy as they forecast further market volatility and they are confident this is the correct approach as borne out by the fund performance returning to above-average over the last month.

Conclusion

Risk aversion fuelled by poor data, a strengthening dollar and an austere budget leads to uncertainty in the equity markets, with lower risk fixed interest investments now appearing fully priced.



Date of Next Meeting:  3rd August 2010