September 2010

Contents

A number of conflicting factors saw UK stocks end the month a little lower.
Positive earnings and a steady flow of takeovers provided good news but continued concerns about the economic picture kept sentiment subdued.
Concerns continued over the economic outlook despite upbeat sales data.
The Monetary Policy Committee voted 8:1 to keep interest rates on hold.
Mervyn King commented that the emergency budget has had little impact on lowering UK GDP growth projections.

US equities declined as the slowdown in global growth raised concerns over the sustainability of the recovery.
A succession of disappointing economic reports, such as high unemployment figures, weakness in the housing market and lacklustre consumer demand, heightened concerns that the US economy could be heading into a “double dip” recession.
Ben Bernanke has pledged that the central bank would provide more stimulus if necessary to revive the economy if it were to experience a sharp deterioration.
Technology stocks, financials and industrials all generated disappointing returns. By contrast, the defensive sectors of telecoms, utilities and healthcare did relatively well.
Given the economic uncertainties and a rise in risk aversion levels, the dollar dropped to a 15 year low against the Japanese Yen but did manage to strengthen against the Euro.
The rise in risk aversion was reflected elsewhere by increased demand for gold and Government bonds.

European equity markets lost ground during August as fears mounted that the global recovery is losing steam.
Positive corporate news and pockets of good regional economic news were offset by weaker global macroeconomic news.
Equities within the healthcare and telecom sectors managed to buck the negative trend as their defensive characteristics were rewarded by the market. Meanwhile, industrial, financial and tech shares underperformed.
Germany’s growth for the 2nd quarter exceeded expectations, but these figures highlight the huge divergences within the Eurozone.
Sovereign debt concerns continue to rumble along in the background, with Ireland’s credit rating being downgraded by S&P on concerns that the rising cost of supporting the country’s struggling banks will swell the budget deficits.
The Euro continued to slide against Sterling and the US dollar by 0.5% and 2.8% respectively assisting European exporters.

The combination of robust domestic economic news and largely upbeat corporate earnings supported Asian equity markets during the month. However, ongoing concerns about the outlook for global growth undermined sentiment and left stocks mixed over the month.
A number of countries released quarterly GDP figures during August and these underlined that conditions in the region remain healthy.
GDP growth in India has reached 8% year on year with growth in Hong Kong, Taiwan, Indonesia and Thailand all above expectations.
Economic data from China suggested that the rate of growth has slowed further from the first quarter’s rapid pace, while inflation headed higher, putting pressure on the authorities to consider increasing interest rates.
Banking stocks were strong performers as the majority reported strong increases in earnings against a backdrop of lower bad debt provisions.
Weaker US jobs and the US housing market data had an adverse knock on effect for stocks in Mexico, which in turn dragged down the performance of Latin American equities. Weaker commodity prices also soured sentiment towards Brazilian stocks.

Lower than expected GDP, a rising Yen and concerns about the global economy resulted in a weak month for Japanese stocks.
The second quarter GDP annualised rate of 0.4% was well below expectations and raised concerns about the outlook for growth.
The strengthening Yen, which reached a 15 year high against the US dollar, was a further challenge for stocks and hopes that the Japanese authorities may intervene in currency markets were not fulfilled.

Fixed Interest markets delivered positive returns, with core Government bond markets leading the way as economic data, particularly from the US, stoked a flight to quality.
Gilts led the outperformance with a 4.7% monthly return according to data from Merrill Lynch.
Sterling and euro denominated bond issuances were low driven by companies, particularly banks, opting to issue in dollars instead.
IBM took advantage of the record low government yields and issued 1.5 billion $ worth of three year notes at just 1%, the lowest coupon rate on record.

Neil feels that we are halfway through the bank crisis recovery and this may take 5 years to resolve.
2011 will be a challenging year – there will be a tough economic environment as the stimulus measures are being withdrawn.
He is surprised how well UK house prices have held up compared to the US, but feels that prices will decline for the rest of this year and into next year due to oversupply and rising unemployment.
He feels that interest rates will remain low and does not consider inflation to be a problem in the UK, or anywhere else, except, perhaps China.
Some parts of the UK economy will struggle, such as consumer sensitive stocks, as consumers continue to reduce debt and save more.
Neil feels that tobacco stocks are still undervalued and this sector, along with pharmaceuticals, will do well.
He conceded that his fund underperformed from March 2009 to March 2010 but since the market has questioned the strength of the recovery, the fund has performed much better relative to both the market and his peer group competitors.

Other seminar feedback was perhaps a little more positive about UK markets than Neil’s due to growth in emerging overseas economies continuing. With China overtaking Japan to become the second largest economy in the World, and India and other Far Eastern economies continuing to grow rapidly, there is a strong argument that the description “emerging” is no longer appropriate. Whilst the UK market has performed well against some other established markets over the year, we still believe portfolios should increase exposure to global equities, particularly those with attractive yields.
With the much publicised spending review just a month away, there is a sense of apprehension about the effects on our market but most investment groups believe this has already been priced in. However, we would be surprised if increased volatility did not result.
The only area where there is almost unanimous agreement at present is that house prices are likely to drift lower. Despite record low interest rates, the lifting of HIPs has led to a flood of property being advertised but uncertainty over jobs, stubborn household inflation and lower pay awards mean that few are prepared to commit. For three months prices have slipped and this trend is likely to continue.
Autumn has arrived!

Date of Next Meeting: 6th October 2010