Equity markets continued to rally during the second quarter of 2009 having bottomed during the early part of March.  Central banks worldwide have injected large amounts of liquidity into the global financial systems in order to stave off the threat of debt deflation.  The policy of ‘quantitative easing’ is being used extensively in the United States and in the UK but the German Government has maintained severe reservations about this policy in spite of the fact that the downturn in the German industrial economy is rather more brutal than in most other industrialised nations.

One notable feature in the currency markets has been the rally in the value of Sterling against most major currencies over the past few months.  We felt that in the spring the majority of the fall in Sterling had been seen but have nevertheless been to some extent surprised by the strong rally that has taken place since March.  We now again feel that, given the severe structural imbalances in the UK economy and the major fiscal and public expenditure challenges which the UK faces, it is hard to see how Sterling can make much further progress in the near term and indeed we would expect to see the currency subside throughout the rest of the year.  Interest rates, we believe, are likely to stay at the current low levels of 0.5% for the foreseeable future, given the inherent weaknesses present in the economy. 

Fixed interest markets were rather dull generally as equity markets continued to recover.  Risk appetite for equity assets was demonstrated by the willingness of investors to take up the numerous rights issues that were announced during the second quarter of the year and it is probable that some of this appetite was sourced from fixed interest markets.  We continue to believe that fixed interest markets will, at least at the short and medium end, remain relatively well supported given the expectation for very low levels of interest rates for the time being, but the requirement of the UK Government to continue to issue somewhat longer dated paper in order to finance expenditure may prove rather indigestible as time goes on.  Notably, any evidence of a pick up in longer term inflation rates would be particularly negative for prospects for long dated paper in the UK.  To this end, we continue to monitor opportunities for adding to exposure in Index Linked markets in order to protect capital values for the longer term.

In the United States, there were some signs of stability returning to the property market in areas, such as Florida and California, which had been particularly hard hit during 2008.  There are still very substantial amounts of money sidelined in money market funds earning virtually no interest and we continue to feel that when confidence returns to the investment community these reserves will be employed in equities rather than fixed interest.  Thus, we believe that equity markets are likely to lead the developed markets out of recession and retain a favourable stance as a consequence.  International investors must consider the value of the Dollar in the medium term and it remains our view that UK investors, who have witnessed the very recent Dollar weakness against Sterling, are likely in the medium term to see the Dollar appreciate and thus the American markets remain a favourable market for investments going forward.

The UK housing market is beginning to show signs of stability returning and this was most marked in the London area, which tends to lead the rest of the country in signalling the direction of future price movements.  Mortgage approval levels were somewhat sluggish in May, whilst estate agents in general reported additional levels of business for the period after Easter.  Stability in the housing market is a major pre-condition for a return in consumer confidence in the UK, so it is particularly important to see whether stability is sustained in the crucial autumn selling period from September.

In Euroland, consumer and industrial confidence recovered a little from the low level seen in the Spring but evidence of any sustained pick up in economic activity was at best patchy.  Economies, such as Spain, Italy and Greece, continue to suffer from rising unemployment levels and, given their membership of the Euro, have been unable to devalue their currencies in order to boost domestic demand.  The message from most central bankers was that the global financial system remains in a sensitive state but, following the massive influx of liquidity into the system, a healing process continues to ensue as we move away from the Lehman led collapse of last September.

The process of de-leveraging in the Hedge Fund community is largely complete but issues remain regarding the availability of credit both to consumers and to industry as more stringent banking guidelines are imposed and stricter guidelines are set for credit to become available. 

It now appears that global depression has been avoided but undoubtedly the set back that we are currently experiencing will be seen at best as a severe recession.  As we have commented before, the market always tries to foresee turning points in the economic cycle and, in anticipation of this, it is our belief that we passed the low point in equity markets in the early part of March.  We continue to believe that in the UK there is some vulnerability to an early pick up in inflationary trends and for this reason we are currently biased towards equities as our preferred asset class.

Although merger and acquisition activity has been subdued and global markets remain somewhat downcast, the re-building of corporate balance sheets through a raft of rights issues indicates that major companies are looking to the medium term to take advantage of opportunities within their respective industries.  The appetite behind the supply of new equity to the corporate sector is not unlimited, however, and it may be that institutions and individuals will become increasingly choosy over which issues they will support.  Indeed, there is some evidence that applications for fund raising by a number of companies have already been turned down in the past month or two.  Our focus will continue to be on well-financed companies with promising growth prospects.  Having seen a respectable rally in the market from the low levels in March, we feel that the markets overall will move sideways throughout the summer period.  There are numerous attractive opportunities emerging, we remain hopeful that the further we move away from the panic that gripped the world in the early autumn of 2008 the greater the likelihood is that investor appetite for risk assets will increase and that some of the very substantial cash deposits currently sidelined in markets will tentatively re-enter the equity arena.



Back to top