Equity capital markets continued to fall in the early part of 2009 although there was a noticeable rally from the low point seen around the beginning of March.  Growth forecasts for all industrial economies were revised significantly lower during the period and the prospect of price deflation and sharply growing unemployment compelled central banks to initiate further measures to inject increased liquidity into the global financial system.  Most notable of these measures was the introduction of “quantitative easing” involving the direct purchase by the Federal Reserve and the Bank of England of Government fixed interest securities and Corporate Bonds.  Other countries, most notably Germany, are reticent about introducing additional stimulatory measures, presumably conditioned by the experience of inflation that was seen in the early 1920’s. 

Following the major falls in Sterling noted during the past six months, the Pound steadied against most major currencies.  The Fiscal and Trade balances of the UK economy remain in deep deficit and the overall level of consumer indebtedness within the UK economy continues to be a problem. Interest rates were duly slashed during the period but are now unlikely to fall much further than the current 0.5%.  Structurally, we continue to believe that Sterling will remain a weak currency in the long term but we feel that the majority of the fall may have now been seen for the short term.

Although estimates of global growth fell sharply over the period, there was a notable bounce in the price of a number of industrial commodities, such as lead and copper.  The gold price firmed a little as investors sought protection from anticipated future inflation given the boost to global money supply.  Oil prices picked up a little during the quarter and it may now be that the short term bottom of the oil price cycle has been seen.  Indeed, the forward price of oil remains sharply higher than current levels anticipating further rises throughout the year.  Growth patterns in the Far East, and in particular China, are key in trying to gauge the future movements in the price of oil and industrial metals and it does now seem that, although the rate of growth in the Chinese economy is slowing, the stimulus package introduced by the Chinese authorities is having some effect and growth rates should not slow as markedly as had first been feared.

Fixed interest markets gave up a little ground during the first couple of months of the quarter but firmed during March as quantitative easing measures implemented by the UK Government took effect.  We believe that fixed interest markets will stay relatively firm for the time being, given the Government’s repurchase programme, but are apprehensive in the longer term that inflationary influences may take hold in the UK economy, which will prove particularly negative for conventional Gilts.  We are looking more closely at opportunities within index linked markets in order to protect the real value of capital. 

In the United States, property prices continued to fall throughout the quarter but towards the end of March there were some signs from some of the longer leading indicators that a small measure of confidence was returning.  The Federal Reserve continued to pump large amounts of liquidity into the banking system and the market recovery in early March was led by sharp upward movements in the financial sector.  It is still the case that substantial investible funds remain sidelined in money market funds, earning minimal rates of interest, and any increased confidence amongst investors to deploy these funds with greater risk appetite in a more risk seeking way would undoubtedly maintain the momentum of the market rally.  However, signs of an economic recovery are at the very best tentative and it is too early to call the turn in the US economic cycle.  It remains our strongly held view that the US, having been the first major economy into recession, will lead the world out of recession and it is here that so called “green shoots of recovery” should first become apparent. 

Levels of indebtedness within the UK economy remain stubbornly high but there were one or two more optimistic signs of tentative recovery within the housing market, a key component of consumer confidence.  Mortgage approval levels rose towards the end of the quarter by more than had been expected as interest rates declined sharply.  Petrol prices, too, are well below peak levels seen last July as the oil price remained relatively subdued.  As we have noted before, the capital markets will look to anticipate any upturn in the real economy some time before confirmatory data comes through.  In this regard, international companies may be better placed to benefit from this trend ahead of purely UK based firms. 

In Euroland, economic news from the major countries continues to deteriorate.  The German economy was forecast to have a deeper recession than expected, given its reliance on export industries which suffered substantially due to the relative strength of the Euro.  More peripheral countries such as Spain, Italy and Greece saw their economic woes become more intractable, given membership of the Euro, as their domestic unemployment rates continued to rise sharply. 

The global banking system remains under severe pressure and in need of further stimulus from the major central banks although there are some signs that the easing process is having some effect.  A large amount of deleveraging has been achieved within the hedge fund community and a substantial amount of investible capital remains on the sidelines in low earning cash deposits.  Although it may thus be too early to call for a major turn in the global capital markets, some of the associated price movements in the oil and commodity sectors do give some credibility to the view that, particularly in the Far East, some of the worst forecasts of economic slump may be avoided.  Our medium term fears for the global economy and for the UK economy in particular are for a resurgence of inflationary trends earlier than some commentators anticipate, given the substantially increased amounts of liquidity being pumped back into the financial system.  The Japanese experience over the past 15 years is, in our view, not an accurate guide for the UK economy looking forward.

The past six or seven months since the collapse of Lehman Brothers have been unprecedented in terms of volatility within global capital markets.  As we have recently highlighted, we do foresee some pick up in merger and acquisition activity throughout the year and this has been evident in some of the major transactions carried out within the pharmaceutical sector globally.  It has been encouraging that there has been an appetite for new equity issuance within the UK market for indebted companies which have good long term prospects but which are currently suffering from an overhang of debt.  We continue to feel that better financed companies will take advantage of their weaker brethren and that there will be significant opportunities for capital growth within some of the substantially depressed areas of the market.  However, our focus will continue to be on the better financed companies which can benefit from this trend but which are not necessarily dependent upon external capital for their growth in the medium term.  We believe that investors will concentrate on this area as confidence begins to return to the market, and that as the “healing process” takes hold we envisage equity markets to be modestly higher later in the year.



Back to top