UK
- The FTSE 100 finished last month below 6,000, the level it enjoyed for most of April. The main detractor from performance was news from the Eurozone, Greece in particular.
- The British Chamber of Commerce cut its predictions for economic growth to 1.3% for this year and 2.2% for 2012, as a result of the continued squeeze on disposable income.
- The Bank of England held interest rates at 0.5% in the belief it is too early to say that recovery is secure and that elevated inflation expectations are becoming entrenched in wage and price setting.
- Inflation expected to rise further and stay above the 2% target throughout 2012.
- Commodity trader Glencore became the first to move straight into the FTSE 100 on flotation since BT and British Gas in the 1980s, however the fall in metal prices with the rise in the dollar saw a fall in the mining sector generally.
- The telecoms sector showed mixed returns, with Vodafone shares falling despite higher revenues and profits. BT however announced a 7% increase in dividends accompanied by strong cost savings.
- The pharmaceutical sector enjoyed a second strong month, along with clothes retailers, who benefited from the brief spurt of warm weather.
- Tesco and Wm Morrison shares rose, as food retailers also reaped rewards from the barbecue weather and Royal Wedding fever.
- Banks retreated, led by Lloyds, which dropped to a one year low.
US
- The US equity market closed down 1.1% at the end of May, it’s worst month since August 2010.
- Energy stocks, which started the month strongly, cooled as oil prices fell from $115 to $100 a barrel.
- The US manufacturing-led recovery has slowed with supply disruptions from Japan and higher commodity prices.
- CPI inflation rose to 1.3% year on year in April, its fourth consecutive rise and the $ 14.3 trillion debt ceiling has now been reached.
- The downward trend in initial jobless claims has stalled and the unemployment rate rose from 8.8% to 9%.
- M&A activity in the healthcare sector continues to accelerate and a technology boom reminiscent of the dot.com era is being led by Linkedin, the business social networking site.
- Financial stocks saw losses with continued concerns over the European sovereign debt crisis but defensive stocks, such as consumer staples, healthcare and utilities, saw strong gains over the month.
EUROPE
- Like their global peers, equity markets came under severe pressure, with concerns surrounding the financial position in Greece impacting on investor sentiment.
- The overall Eurozone first quarter GDP was up 0.8%, with Germany still in the lead at 1.5%, with an unexpected slight fall in inflation.
- Overall Eurozone inflation was at 2.7% compared to 2.8% in April, with Italy and Spain holding steady. This is still above the ECB target of 2% and suggests a pause in the Bank’s aggressive interest rate stance, although this is not expected to last, with rate hikes later in the year still on the agenda.
- Unemployment remains the major concern in peripheral countries, with Spain, Ireland & Portugal topping the list. However, Spain and Portugal made good progress with deficit reductions, whilst Ireland and Greece continue to struggle, with Greece especially most likely to be in need of a second and tougher bail-out.
- Oil, Gas, Utilities and Technology sectors were weak, whilst pharmaceuticals were more resilient, with positive returns in an otherwise weak market.
- Sweden saw healthy growth of 0.8%, whilst the Swiss economy grew by a more modest 0.3% due to the strong Swiss franc affecting exports.
ASIA & EMERGING MARKETS
- Equity markets were broadly weaker as concerns grew that central banks’ tightening monetary policy may slow economic growth.
- Oil and commodity prices fell with fears that the global economic recovery is faltering.
- China CPI increase 5.3% year on year in April, down from the previous month, as the banks raised the reserve requirements and continued to try to curb inflation. Retail sales remained strong.
- Chinese banks continued to impress with strong first quarter results.
- The Reserve Bank of India raised short term lending rates by 50 basis points to 7.25%, as GDP grew less than expected and wholesale price inflation rose higher than expected at 8.7% year on year in April.
- Australian GDP fell by 1.2% quarter on quarter in the aftermath of the floods at the start of the year.
- South East Asia first quarter GDP was more robust, reflecting strong exports and private consumption.
- The MSCI Emerging Markets US dollar index fell by 3% during May as several central banks tightened monetary policy to tackle inflation.
- Investor sentiment soured, with Turkey, South Africa and Latin America dragged down by underperformance in the materials and energy sectors. There are fears that the Turkish economy is overheating and government plans to curb borrowing and bank expansion to slow the booming economy.
- Indonesia posted positive returns in the consumer related sector, Brazil and Mexico were the weakest performers. Russia is still supported by buoyant oil tax revenues and the budget deficit is expected to be lower than forecast.
- Poland is expected to raise interest rates by 0.25% due to inflationary pressures – strength in the domestic economy was reflected in April retail sales rising by 18.6% year on year.
- From a sector perspective, energy, materials and industrials were the worst performers in emerging markets, whereas the defensive sectors of utilities and healthcare outperformed.
JAPAN
- The Bank of Japan announced that they plan to lend as much as 20bn JP Yen to encourage companies to re-build and stay afloat post the earthquake.
- Interest rates have remained unchanged at 0% - 0.1% and a 10 trillion JP Yen asset purchase fund is being maintained to help boost the economy.
- Sumitomo Mitsui Financial and Mizuho financial reported solid quarterly earnings and gave guidance of anticipated earnings ahead of expectation.
- The weak Yen has dragged on a number of exporters, machinery orders were down and Toyota reported a lower than expected profit outlook, which has impacted on the motor industry as a whole.
- Japan officially back in recession post earthquake, following poor first quarter results. Supply constraints are not expected to ease sufficiently for noticeable growth until the end of this year.
FIXED INTEREST
- Fixed Interest returns remain broadly positive, with Core government bonds being the strongest performers and yields falling on UK, US and German bonds especially.
- Yields in the troubled peripheral eurozone countries rose as investors became increasingly concerned about debt re-structuring and default.
- Issuance remained high in Investment Grade and High Yield, with risk aversion driving the spread over government bonds wider. The yield on Sterling Corporate debt fell by 3 base points, with the spread over gilts rising 11 base points. Euro Corporate yields fell 18 base points, with the spread over German Bunds 5 base points wider.
- Higher credit quality categories performed best whilst bank debt remains the weakest category.
Investment Seminar Feedback
Seminar with Martin Gray - Manager of the Miton Special Situations Fund
- Debt is being paid off balance sheets however the cash on balance sheets will be needed to soak up lower demand
- Expecting a 0.25% - 0.50% rise in interest rates this year
- Inflation will be flat
- We haven’t seen any of the fiscal pressures come into play yet
- No Euro exposure as he feels the concept does not work
- Likes Gilts as the Government can print their own money whereas companies cannot
- Short ETFs in Copper and Silver
- Energy supply risks
- Gold – stopped buying at $850, lots of speculation, won’t buy at $1,500
- Cash is being managed – 50% sterling, 20% US, 10% Yen, 10% Singapore Yen & 10% Swiss Francs
- Short ETF on Crude Oil
- Long on Japan, Healthcare US
- We look at this fund as an insurance policy when markets are underperforming as it will perform well compared to most others in poor equity market conditions
Conclusion
The news has not changed much since last month. House prices are still falling, which is not being helped by the lack of lending by the Banks and Building Societies. Government are putting pressure on them to loosen their criteria, however, with prices still falling they are not inclined to do so.
Interest rates held again with the hope that it will help businesses expand, which may have helped the good news that unemployment has fallen again.
We have seen a slight sell off due to fears in the Eurozone, most significantly the Greek debt problems. The Greek Government has to agree on a new set of austerity measures before it receives its next bail out, which we expect to come soon.
Date of Next Meeting: 14th July 2011
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