Market Round Up

The withdrawal of economic stimulus packages and concerns over European Sovereign debt has caused a significant loss of confidence among some investors. However, the jury is out as to whether this represents a healthy correction in an extended bull market or another leg of the long term bear market.

There remains a great deal of uncertainty although we agree with some commentators that it is important not to lose sight of the positives in the global economy.  Business confidence is generally strong because even troubled regions such as Europe are seeing solid export demand.  Other commentators are mindful that debt sustainability and the potential that emerging markets may overheat will continue to worry investors for some time to come.

UK

• It is viewed as encouraging that the new coalition government has wasted no time in starting to tackle the huge budget deficit.
• BOE has put its money printing programme on hold
• UK recovery appears to be on track and there is evidence that the real economy is gaining momentum
• Inflation data comes in ahead of expectations at 5.3% which is a 19 year high

Europe

• In the last month European equities have fallen amid fears that the Eurozone would struggle to cope with the huge debts run up by some member states.
• Spain’s economy was downgraded by Fitch from AAA to AA+.
• The Spanish authorities had to rescue one of the country’s lending banks which had fuelled its 10 year housing boom.
• Many of the country’s other banks have “toxic” loans and a hurried merger took place between 4 banks in an attempt to stop them going under, causing the Euro to fall sharply in response.
• Some commentators feel that the decision by the German authorities to ban “short selling” of German banks and sovereign debt, raises suspicion about what the policy makers may be hiding and it does little to solve the underlying problem of European Governments accumulating too much cash.

US

• Shares in major investment firms were hit after the US Regulator sued Goldman Sachs for fraud.
• Encouraging signals emerging for future growth – sales of new homes jumped by 27% the biggest monthly increase for 47 years.  This was boosted by buyers wishing to qualify for a government tax relief. However figures on unemployment were not as positive.
• Manufacturing activity also picked up to the highest level in 5 years.
• BP’s struggle to contain the Gulf of Mexico oil spill has hurt not only BP but a range of other companies in the energy sector as President Obama announced a freeze on a number of offshore drilling projects

Asia and Emerging Markets

• Escalating tension between North and South Korea, and China refusing to condemn North Korea for sinking a South Korean warship caused a fall in Asian equities.
• China and India still have low household borrowing compared to the West and continue to produce impressive GDP growth.
• First quarter GPD in China hits an impressive 11.9%

Fixed Interest

• Corporate bonds lost over 5% in May, a fall similar to that of equities.
• After a year of exceptional returns from credit markets, Ian Spreadbury of Fidelity says that the spectre of sovereign debt now looms large on the horizon
• The recent market movements were seen as a “text book” risk asset sell off and there were very few hiding places except high quality government bonds
• Spreadbury is also forecasting that slow growth and low inflation will be the probable outcome in the UK for the medium term and in this environment high quality corporate bonds should still offer value
• Weak growth presents a key risk for the high yield sector
• Diversification across the fixed interest sector will be even more important for fund managers in the future

Investment Seminar Feedback

Web Conference for the Schroder Income Fund – 3rd June 2010

• Fund Managers – Kevin Murphy & Nick Kirrage (since May 2010)
• Looking for value driven by cash generation and companies’ ability to pay dividend and not a short term distribution policy
• Businesses must be cheap and have a high yield, they look for companies with:
• Sound financial ratio
• Good cash characteristics
• Management who act in shareholders’ best interests
• Proven ability to generate a decent return on capital and a history of doing so
• Low valuation when compared to normal/mid cycle profits
• The most important risk to be aware of is the risk of losing money
• Balance Sheet Risk – avoiding permanent loss of money
• Valuation Risk – not overpaying for investors
• Company/Industry risk – avoiding companies with declining profits
• The pressure to outperform over every time period is immense which can lead to poor short term decisions and is a risk they want to avoid
• They see consumer staples, healthcare and materials as risky assets to hold, with lower than benchmark holdings in basic materials
• Financials, tech, industrials, energy, utilities, telecomm, consumer services – these are the areas that they see future value & 50% of their fund is invested in these assets with the exception of utilities and lower than benchmark holdings in and consumer services
• They really like financials and bought banks when everybody else wanted to sell at any price. They can see 100% upside on banks, which make them an attractive asset.
• All UK banks have enough capital to withstand a double dip recession. They currently hold RBS, Lloyds, Barclays even though there is no dividend being paid on these
• No major changes have been made to this portfolio since they took over from the previous managers besides them buying more BP in the last 24 hours. They are very comfortable with the stocks in their portfolio and are in no hurry to start chopping and changing the portfolio.
• As a result of the appointment of the new fund managers for the Schroder Income fund, OBSR, the fund rating company, have  suspended their AA Rating awarded to the fund  OBSR will be meeting with the new managers, to review the fund at the earliest opportunity.  We will be monitoring this situation and we will write to those clients who hold the fund if we believe action is required.   

TwentyFour Dynamic Bond – Meeting with manager Gary Kirk

(This is a fund currently on our “Watch List”)

• Gary explained the strong background in managing institutional money of him and his team
• The Monumental Bond fund which focuses on floating rate assets has been well supported by institutions such as F&C, Insight, Premier and PSigma and raised £114M since launch in September 2008.
• The newly launched Dynamic Bond fund is aiming for a steady 8% to 10% return throughout the cycle by holding focussed positions in bond strategies where they have conviction and where there is liquidity.
• All bonds are swapped back into floating rate supply allowing them to choose where they want the duration to be. A system developed with Bloomberg allows them to invest by stripping out risks related to duration, foreign exchange rates and credit.
• Strong expertise in asset backed securities where AAA asset backed securities are “possibly stronger than UK gilts”. Their models show that AAA asset backed securities require a 70% fall in house prices and 1 in 4 property foreclosures before the credit is jeopardised.

Conclusion

Volatility – with mixed signals concerning growth forecasts and other conflicting data and with the sovereign debt concerns in Europe, the equity markets react violently to both positive and negative data.

This is likely to continue for some time due to the focus on new data. With a budget less than a week away everyone is waiting with baited breath to see if the new chancellor can steer a course of cuts and tax rises that are acceptable to both the city and the public. With Bank base rates likely to remain low for sometime the current issues of NS&I index-linked savings certificates look very attractive especially as the returns are tax free if held for three or five years. They pay 1% over RPI (3.4% last month). A good home for some cash deposits


Date of Next Meeting:  7h July 2010