Market Bulletin
MONDAY 13 SEPTEMBER 2010
Tel: 01437 766396
Email: mark.burch@sjpp.co.uk
Website: www.burchwealthmanagement.co.uk
This weekly Briefing Note aims to pick out some of the
key financial and economic issues touched on in the
press over recent days and from time to time includes
the views of some of our independent fund managers.
Markets shake off uncertainty
Last week saw a general rise in global markets, with the
UK FTSE 100 achieving levels not seen for over four
months. However, the overall gains masked continuing
uncertainties, as financials and energy stocks ‘see-
sawed’ throughout the week. Whilst the Bank of
England Monetary Policy Committee’s decision to
maintain interest rates and quantitative easing at current
levels was widely expected, the rapid and spectacular
crash of Connaught, the building and support services
firm, provided a stark reminder of the harshness of the
current environment.
Connaught went from a stock market value of £626m to
bust in just three and a half months. A lack of clarity
around the company’s reporting and true financial
situation compounded by their reliance on local council
spending, which is expected to be severely limited by
governmental austerity measures, led to a run by
creditors, finally resulting in Connaught running out of
cash. None of the St. James’s Place funds had holdings
in the company.
In the financials arena, the announcement of Bob
Diamond as the new chief executive of Barclays Group
prompted mixed reaction, somewhat surprisingly given
his track record. This is a man who has been
responsible for the development of Barclays Capital
into a global financial colossus in just 13 years. His
track record alone should have dispelled any fears.
However, as an investment banker, he is regarded with
suspicion by some shareholders and investors, who
suspect his entrepreneurialism will lead to increased
_
risk taking and greater potential for catastrophe. In the
current environment of increased corporate governance and
governmental regulation, it is unlikely that Barclays will be
led to meltdown by an optimistic doer who has experience
of building a global brand.
Cutters vs. Spenders
With the back drop of governmental austerity measures
being indirectly linked to the Connaught decline the
argument between the ‘cutters’ and ‘spenders’ continues, as
reported by The Financial Times, both in the UK and in
the US.
The argument against austerity measures has been recently
joined by Ed Balls, Labour Party leader nominee. He
argues that, with a credible economic alternative to the
expected measures, the aggressive cuts could be avoided
and the rug not pulled from under the fledgling recovery.
Balls went as far as to suggest that the Government’s
approach to spending is “economically misguided and
dangerous”. However, what this fails to recognise is that
the Coalition inherited a policy of fiscal tightening which
they have simply accelerated in order to complete it, so that
it does not spill into a new parliament. The short term aim
was to reassure markets and regain fiscal credibility for the
UK. The current low gilt yields would seem to reflect, at
least in part, the confidence instilled by the announced
measures, although the spenders will say that they indicate
no crisis in the public finances.
In the US, it would seem that President Obama and his
regime fall squarely into the camp of ‘spenders’. His new
proposals, which include $50bn of extra spending on
infrastructure, expanded tax credits and relaxed rules on
corporate investment write-offs, would all seem to offer
boosts to corporate U.S.A. However, it is highly likely
they will be rejected or diluted. The current US
stimulus package sits at $1 trillion and seems to have
been largely ineffective, so what will an extra £50bn
achieve? Whilst tax incentives may seem attractive, it
is highly likely they will be replaced by other taxes.
Many see the proposals as purely electioneering to try
and stave off the march of Republican candidates in the
mid-term elections in 50 days’ time.
The Federal Reserve Board’s business survey’s noted
“widespread signs of deceleration (in growth) compared
with preceding periods” are currently offset by
increased consumer spending activity and a reduced
trade gap. However, consumer and trading confidence
may take a knock if government policy is further
clouded by political infighting.
What cannot be denied is that the banks continue to
hoard funds. Unless the financial institutions begin to
lend more widely at reasonable terms, any further
easing will simply improve the balance sheets of many
banks.
End of Year Stock market predictions encourage
Encouragingly, The Sunday Times reported that City
analysts are predicting a 10% share price rally by the
end of the year. Although UBS downgraded their FTSE
100 forecast for the year end from 6250, they still
targeted 6,000. This aligned with Citigroup, whilst
Morgan Stanley upgraded forecasts from a rather
pessimistic 5,000 to 5,800.
Expectation will be buoyed by improving US trade
deficit data and a reducing number of unemployment
benefit claimants in both the UK and US. At the same
time, the Organisation for Economic Co-operation and
Development (OECD) said Britain would be the fastest-
growing economy in the G7 group of industrialised
nations in the third quarter of this year.
Recent profit reports from a large number of big
businesses have also boosted confidence. However, it
cannot be ignored that a large proportion of these profits
have come from cost cutting and streamlining in flat
markets.
So which areas might lead the charge? Two possible
opportunities highlighted, which are pursued by a
number of managers of St. James’s Place funds, were
banks and companies from developed economies with
exposure to emerging markets.
Lloyds Banking Group led the FTSE rally last week
after several analysts updated their outlook for the
stock, noting a number of UK domestic banks still offer
long term value.
With the wealth of conflicting comment, policy and
data we asked Mark Lyttleton, co-manager of the
St. James’s Place UK Absolute Return funds, which can
take advantage of both falling and rising share prices, to
comment. “Equity markets globally were weak last
month as investors continued to wrestle with the
fragility of the economic recovery, particularly in the
United States. In our mind, the data is inconclusive. On the
one hand, it is perfectly consistent with historic precedents
that the rate of expansion should slow in the second year of
recovery. On the other, the removal of stimulus and the
need to reduce excess leverage understandably raises
questions as to what the new normalised level of aggregate
demand really is.
A good illustration of the uncertainty surrounding the
economic outlook is US employment data. In August,
private employment grew by only 71,000 and the previous
month’s report was revised sharply lower, but the
workweek continued to expand and hourly earnings also
rose. On balance, we believe the evidence points to a mid-
cycle slowdown rather than a prelude to a double-dip
recession and are comforted by the vigilance of financial
authorities globally. One particular illustration is the
Federal Reserve’s announcement that principal payments
from its agency and Mortgage Backed Securities holdings
would be reinvested into longer-term Treasuries in a move
designed to bolster growth and prevent the US economy
from lapsing into recession.
Within the fund, we modestly reduced the net exposure (the
value of our long positions less the value of our short
positions) of the Fund over the month but our gross
exposure (the combination of our long and short positions)
remains high, reflecting the conviction we have in a
number of different stock positions. We remain positively
exposed towards the beneficiaries of increasing corporate
discretionary expenditure and further healing of funding
markets, but are more cautious on areas of the economy
that remain over leveraged”.
Considering alternative investments
With the uncertainty felt by many and the average easy-
access account paying “a measly 0.77%” (The Sunday
Telegraph – source: Moneyfacts), The Sunday Times
considered alternative investments.
They reported that thousands of savers who invested in
products claiming to offer stock market returns without
risks are finding that they are maturing and paying little
more, or even less, than they would have got from cash on
deposit.
Protected or structured products, which accounted for
£13.9bn in investment in 2009, have been maturing this
summer and many are only repaying the original capital
invested. 5 year plans maturing this year have seen no
stockmarket growth versus a rise in the retail prices index
of 16.6% in the same period (July 2005 to July 2010).
Concerns were also raised over the ability to exit early if
conditions were unfavourable and the penalties for doing
so. Shorter term products also came in for criticism.
The Sunday Times also carried an extensive article on the
rush by many fund managers to launch bond funds,
focussing on those offering a higher income or yield.
Yields on traditional bond funds have been falling as
institutional and private investors have moved into this
area, as evidenced by the Investment Management
Association’s data indicating the fixed income sector payments to investors or repay the loan. The investor can
was the best selling in July. call upon tangible assets such as property, machinery or
even intellectual property rights in lieu of the debt. In this
It was interesting to note that whilst the article outlined way the investor may recoup a greater proportion of their
high yield bonds, and funds investing into them, which investment in the event of a default.
offer higher potential returns but with bigger risks, no
mention was made of Senior Secured Debt (SSD).
These bonds seek to offer an alternative route to
recovery if the company cannot maintain their interest
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