Equity income was uppermost in many investors’ and advisers’ minds during June with newsflow during the month dominated by speculation – and, eventually, confirmation – that troubled oil giant BP would cancel its dividend.
BP has been under pressure since the middle of April. Following an explosion at an offshore rig in the Gulf of Mexico, in which 11 people died, oil has been leaking into the ocean, and the cost to the company – not only in monetary terms, but also reputationally – continues to rise.
BP has cancelled its dividend payment for the next three quarters and announced it intends to sell oil and gas fields and reduce investment in drilling. The company has agreed to set up a $20bn (£13bn) fund to fund compensation claims filed by those affected by the oil spill, although BP’s actual liabilities are, as yet, unknown. President Obama warned that the fund would not cap BP’s liability for the costs of the cleanup, or supersede individuals’ or states’ entitlements to launch their own legal action against the company.
Before the news of the dividend cancellation, BP led the FTSE 100 companies in dividend payments. According to Capita Registrars, the top five UK companies for dividend payments – headed by BP – paid 56% of the FTSE 100 index’s total yield during the first three months of 2010. Some equity income fund managers are now wondering how to maintain their own funds’ dividend payments.
Many funds that hold BP are index-tracking portfolios that have no option but to own the stock. Even individuals without direct exposure to BP might be indirectly exposed through their pension fund or through a collective investment scheme. For its part, the National Association of Pension Funds estimates UK pension funds’ exposure to BP is only about 1.5% of their total assets, but remained cautious on the longer-term prospects for the company.
Although BP’s decision to cancel its dividend has created something of a headache for equity income fund managers, investors should not forget that the UK equity market includes many other sizeable companies with strong balance sheets that should help to plug the gap.
Looking further ahead, although BP’s future remains cloudy, and the costs of the oil leak continue to mount, it is worth remembering that many companies that cut or cancelled dividend payments during the torrid times of the credit crisis – most notably the major banks – have now resumed their payouts.
Friday, 16 July 2010
Emerging Markets continue to decline on world recovery doubts
June saw a sharp rise in risk aversion as investors became increasingly preoccupied about the strength and sustainability of the economic recovery, and share prices in emerging markets were not immune from these nerves.
Nevertheless, towards the end of the month, a positive reaction from G20 leaders about plans to cut deficits within developed economies provided a boost in demand for shares in emerging markets.
Lower commodity prices placed share prices in Brazil under pressure, while speculation that Spain’s credit rating was under review compounded investors’ nerves. Brazil’s central bank does expect the country’s economy to expand by 7.3% this year, boosted by domestic demand, but it also warned that the debt crisis in Europe is likely to continue to exert further pressure.
The International Monetary Fund warned that Russia might have to allow its currency to appreciate in order to put a brake on inflation and that the government should start to withdraw its fiscal stimulus. Russian interest rates remained unchanged at 7.75% during June as inflationary pressures ease and the pace of the economic recovery picks up. Meanwhile in India, finance minister Pranab Mukherjee said the country’s economy could expand by more than 8.5% this year and by 9% next year
Share prices in China fell towards the end of the month amid concerns that expectations for economic growth in the country might be tempered by worries over the debt crisis in the eurozone and tighter policy. The People’s Bank of China believes that the country’s economy is likely to “maintain steady and rapid growth” during 2010, but warned that the backdrop, both internal and overseas, remains complicated.
The Chinese authorities also announced their intention to make the exchange rate more flexible, although China’s central bank does not intend to instigate an immediate revaluation of the yuan. China is now widely expected to dilute or abandon the two-year peg of the yuan to the US dollar, and might look instead to peg the yuan to a basket of currencies that provide a more accurate reflection of China’s principal export markets. However, the possibility of a stronger yuan triggered some concerns of slower economic growth and a drop in export activity.
In its annual report, the Bank for International Settlements warned that emerging economies might have to increase interest rates and allow their currencies to appreciate in order to avoid the inflationary pressures and the formation of asset bubbles
Nevertheless, towards the end of the month, a positive reaction from G20 leaders about plans to cut deficits within developed economies provided a boost in demand for shares in emerging markets.
Lower commodity prices placed share prices in Brazil under pressure, while speculation that Spain’s credit rating was under review compounded investors’ nerves. Brazil’s central bank does expect the country’s economy to expand by 7.3% this year, boosted by domestic demand, but it also warned that the debt crisis in Europe is likely to continue to exert further pressure.
The International Monetary Fund warned that Russia might have to allow its currency to appreciate in order to put a brake on inflation and that the government should start to withdraw its fiscal stimulus. Russian interest rates remained unchanged at 7.75% during June as inflationary pressures ease and the pace of the economic recovery picks up. Meanwhile in India, finance minister Pranab Mukherjee said the country’s economy could expand by more than 8.5% this year and by 9% next year
Share prices in China fell towards the end of the month amid concerns that expectations for economic growth in the country might be tempered by worries over the debt crisis in the eurozone and tighter policy. The People’s Bank of China believes that the country’s economy is likely to “maintain steady and rapid growth” during 2010, but warned that the backdrop, both internal and overseas, remains complicated.
The Chinese authorities also announced their intention to make the exchange rate more flexible, although China’s central bank does not intend to instigate an immediate revaluation of the yuan. China is now widely expected to dilute or abandon the two-year peg of the yuan to the US dollar, and might look instead to peg the yuan to a basket of currencies that provide a more accurate reflection of China’s principal export markets. However, the possibility of a stronger yuan triggered some concerns of slower economic growth and a drop in export activity.
In its annual report, the Bank for International Settlements warned that emerging economies might have to increase interest rates and allow their currencies to appreciate in order to avoid the inflationary pressures and the formation of asset bubbles
Recovery jitters lead investors to fixed-interest assets
Disappointing economic data from the US boosted demand for fixed-income assets during June, after a May in which net retail sales of bond funds dropped sharply to reach their lowest level since August 2008.
The UK government raised £8bn from the sale of a 4.25% gilt with a 30-year maturity. The sale took place through banks and was the biggest syndicated gilt offering by the UK Debt Management Office (DMO) to date. The DMO’s chief executive commented that the sale’s success “reflects well on the continued strength and attractiveness of the gilt market”.
Sterling and government bonds also received a boost following the coalition government’s Emergency Budget, which provided some encouragement that the government is working to bring down the UK’s substantial budget deficit. However, the Government’s planned programme of spending cuts and tax increases is expected by many to hamper the UK’s economic recovery. Ongoing concerns about the outlook for the eurozone’s economy provided further support for sterling against the euro. The pound also strengthened against the US dollar towards the end of the month as G20 leaders backed the UK’s plans to cut its budget deficit.
June saw the Bank of England (BoE) maintain interest rates at an all-time low of 0.5 for a sixteenth consecutive month; however, one member of the central bank’s interest-rate-setting committee broke ranks to vote in favour of an increase in rates. This helped to fuel expectations of higher interest rates later in the year, providing fresh impetus for the pound. The BoE’s favoured measure of money supply (M4) saw strong growth, indicating the central banks’ programme of quantitative easing measures is having an effect.
In his inaugural Mansion House speech, Chancellor of the Exchequer George Osborne announced sweeping changes to the regulation of the UK financial sector. He intends to scrap the present structure of financial regulation and hand responsibility for regulating the UK’s financial sector to the BoE.
The UK Gilts sector was the best-performing IMA sector during May. The only IMA sectors to achieve positive returns during the month were the Global Bond sector, the UK Index-Linked Gilts sector and the UK Gilts sector. The Sterling Strategic Bond sector was the fourth most popular sector among retail investors, but proved the least popular sector for institutional investors during the month. Looking back, the Sterling Corporate Bond sector proved the most popular sector for both retail and institutional investors during 2009 as a whole.
The UK government raised £8bn from the sale of a 4.25% gilt with a 30-year maturity. The sale took place through banks and was the biggest syndicated gilt offering by the UK Debt Management Office (DMO) to date. The DMO’s chief executive commented that the sale’s success “reflects well on the continued strength and attractiveness of the gilt market”.
Sterling and government bonds also received a boost following the coalition government’s Emergency Budget, which provided some encouragement that the government is working to bring down the UK’s substantial budget deficit. However, the Government’s planned programme of spending cuts and tax increases is expected by many to hamper the UK’s economic recovery. Ongoing concerns about the outlook for the eurozone’s economy provided further support for sterling against the euro. The pound also strengthened against the US dollar towards the end of the month as G20 leaders backed the UK’s plans to cut its budget deficit.
June saw the Bank of England (BoE) maintain interest rates at an all-time low of 0.5 for a sixteenth consecutive month; however, one member of the central bank’s interest-rate-setting committee broke ranks to vote in favour of an increase in rates. This helped to fuel expectations of higher interest rates later in the year, providing fresh impetus for the pound. The BoE’s favoured measure of money supply (M4) saw strong growth, indicating the central banks’ programme of quantitative easing measures is having an effect.
In his inaugural Mansion House speech, Chancellor of the Exchequer George Osborne announced sweeping changes to the regulation of the UK financial sector. He intends to scrap the present structure of financial regulation and hand responsibility for regulating the UK’s financial sector to the BoE.
The UK Gilts sector was the best-performing IMA sector during May. The only IMA sectors to achieve positive returns during the month were the Global Bond sector, the UK Index-Linked Gilts sector and the UK Gilts sector. The Sterling Strategic Bond sector was the fourth most popular sector among retail investors, but proved the least popular sector for institutional investors during the month. Looking back, the Sterling Corporate Bond sector proved the most popular sector for both retail and institutional investors during 2009 as a whole.
An eventful month for UK equity investors
In a month largely dominated by negative newsflow – ranging from concerns over the sustainability of the economic recovery and the long-term effects of Chancellor of the Exchequer George Osborne’s planned spending cuts.
To the continued fallout from BP’s catastrophic oil leak in the Gulf of Mexico – investors’ appetite for risk dwindled and share prices fell. Over the second quarter of 2010 as a whole, the FTSE 100 index declined by 13.4%.During the month, the Chancellor announced a series of controversial spending cuts and tax rises in the coalition government’s emergency Budget, aimed at bringing down the UK’s massive budget deficit. Measures included an increase in VAT from 17.5% to 20% from January 2011, and increased capital gains tax for higher-rate taxpayers.
Most government departments will undergo substantial real budget cuts, while various benefits are to be cut, capped or frozen. Meanwhile, the Government is to introduce a bank levy – on UK banks, building societies and the UK-based operations of international banks – that is expected to raise £2bn per year. Reaction to the measures was mixed with some critics protesting the spending cuts could trigger a “double-dip” recession.
The share price of beleaguered oil company BP proved particularly volatile during the month. Since an offshore rig exploded in the Gulf of Mexico during April, BP’s share price has fallen by more than half. Nevertheless, the company’s share price experienced some sporadic upward movement during June amid speculation that BP might become a target for a predator. However, some analysts believe the prospect of a takeover bid remains unlikely while BP’s liabilities remain unquantifiable. Under intense pressure from the US government, BP announced the cancellation of its dividend for the next three quarters.
UK retail sales registered stronger-than-expected growth during June, boosted by strong demand for televisions to watch the football World Cup. However, consumer confidence continued to fall while UK inflation dropped more quickly than expected during May, held back by lower food prices and slower price growth for petrol and alcohol.
Food retailer Tesco reported stagnant quarterly sales growth as the company struggled with lower food prices. Management blamed high fuel prices that left consumers with less money to spend elsewhere. Nevertheless, US investment guru Warren Buffett has continued to add to his holdings in Tesco and now owns more than 3% of the company through his Berkshire Hathaway investment company.
To the continued fallout from BP’s catastrophic oil leak in the Gulf of Mexico – investors’ appetite for risk dwindled and share prices fell. Over the second quarter of 2010 as a whole, the FTSE 100 index declined by 13.4%.During the month, the Chancellor announced a series of controversial spending cuts and tax rises in the coalition government’s emergency Budget, aimed at bringing down the UK’s massive budget deficit. Measures included an increase in VAT from 17.5% to 20% from January 2011, and increased capital gains tax for higher-rate taxpayers.
Most government departments will undergo substantial real budget cuts, while various benefits are to be cut, capped or frozen. Meanwhile, the Government is to introduce a bank levy – on UK banks, building societies and the UK-based operations of international banks – that is expected to raise £2bn per year. Reaction to the measures was mixed with some critics protesting the spending cuts could trigger a “double-dip” recession.
The share price of beleaguered oil company BP proved particularly volatile during the month. Since an offshore rig exploded in the Gulf of Mexico during April, BP’s share price has fallen by more than half. Nevertheless, the company’s share price experienced some sporadic upward movement during June amid speculation that BP might become a target for a predator. However, some analysts believe the prospect of a takeover bid remains unlikely while BP’s liabilities remain unquantifiable. Under intense pressure from the US government, BP announced the cancellation of its dividend for the next three quarters.
UK retail sales registered stronger-than-expected growth during June, boosted by strong demand for televisions to watch the football World Cup. However, consumer confidence continued to fall while UK inflation dropped more quickly than expected during May, held back by lower food prices and slower price growth for petrol and alcohol.
Food retailer Tesco reported stagnant quarterly sales growth as the company struggled with lower food prices. Management blamed high fuel prices that left consumers with less money to spend elsewhere. Nevertheless, US investment guru Warren Buffett has continued to add to his holdings in Tesco and now owns more than 3% of the company through his Berkshire Hathaway investment company.
European markets concerned about sovereign debt
European markets endured another challenging month as worries about some countries’ indebtedness continued unabated, accompanied by widespread concerns that stringent austerity measures imposed by governments might hold back economic recovery.
Investors’ concerns over prospects for recovery were compounded by fears of another credit crunch, as Europe’s debt crisis has made the region’s banks increasingly reluctant to lend to one another. “Stress tests” on the region’s banks have been performed and will be published in due course.
Although the criteria for the tests are currently unknown, the decision to publish was welcomed by shareholders. Nevertheless, some banks complained that, unless the region’s governments pledge financial assistance to weaker institutions, publication of the tests’ results might ultimately damage confidence in the banks.
The end of the month saw sharp falls in share prices and the value of the euro amid concerns banks might not be able to repay hundreds of billions in emergency loans to the European Central Bank (ECB) by a 1 July deadline. Nevertheless, as June ended, the ECB announced it would lend a lower-than-expected amount to the banks, and this news cheered investors, as it suggested the eurozone’s financial sector might be in better shape than previously thought.
The euro endured a torrid month amid ongoing concerns over possible defaults by some highly indebted countries within the eurozone. Nevertheless, the weak euro is making the region’s exports more attractive to countries outside the region. According to the EU’s statistics office, exports in the eurozone rose by 2.5% during the first three months of 2010, compared with growth of 1.7% in the previous quarter.
That said, it is worth remembering that Germany, the eurozone’s largest economy, relies heavily on demand from its fellow eurozone members for its exports. Indeed, investor confidence plummeted in Germany during June as investors became increasingly worried that the European debt crisis would hamper growth in exports and the German economy.
The ECB maintained interest rates in the eurozone at 1% during June, and the bank’s president Jean-Claude Trichet warned that growth would be “uneven”. Lower government spending and higher taxes in the region are likely to avert any risk of excessive inflationary pressure, allowing the ECB to retain its relatively loose monetary stance.
Demand for European equities during the month was low while Europe excluding UK was one of the worst-selling IMA sectors in terms of net retail sales – surpassed only by Asia Pacific excluding Japan.
Investors’ concerns over prospects for recovery were compounded by fears of another credit crunch, as Europe’s debt crisis has made the region’s banks increasingly reluctant to lend to one another. “Stress tests” on the region’s banks have been performed and will be published in due course.
Although the criteria for the tests are currently unknown, the decision to publish was welcomed by shareholders. Nevertheless, some banks complained that, unless the region’s governments pledge financial assistance to weaker institutions, publication of the tests’ results might ultimately damage confidence in the banks.
The end of the month saw sharp falls in share prices and the value of the euro amid concerns banks might not be able to repay hundreds of billions in emergency loans to the European Central Bank (ECB) by a 1 July deadline. Nevertheless, as June ended, the ECB announced it would lend a lower-than-expected amount to the banks, and this news cheered investors, as it suggested the eurozone’s financial sector might be in better shape than previously thought.
The euro endured a torrid month amid ongoing concerns over possible defaults by some highly indebted countries within the eurozone. Nevertheless, the weak euro is making the region’s exports more attractive to countries outside the region. According to the EU’s statistics office, exports in the eurozone rose by 2.5% during the first three months of 2010, compared with growth of 1.7% in the previous quarter.
That said, it is worth remembering that Germany, the eurozone’s largest economy, relies heavily on demand from its fellow eurozone members for its exports. Indeed, investor confidence plummeted in Germany during June as investors became increasingly worried that the European debt crisis would hamper growth in exports and the German economy.
The ECB maintained interest rates in the eurozone at 1% during June, and the bank’s president Jean-Claude Trichet warned that growth would be “uneven”. Lower government spending and higher taxes in the region are likely to avert any risk of excessive inflationary pressure, allowing the ECB to retain its relatively loose monetary stance.
Demand for European equities during the month was low while Europe excluding UK was one of the worst-selling IMA sectors in terms of net retail sales – surpassed only by Asia Pacific excluding Japan.
Japanese market hit by economic uncertainty
In common with many other major equity markets, Japanese share prices ended June firmly in negative territory as concerns over the prospects for the global economic recovery continued.
The Nikkei 225 Average index fell by 4% over June, the third consecutive month in which the benchmark index had declined. Unexpectedly disappointing consumer confidence and unemployment figures from the US weighed on share prices in Japan – and across the world – amid renewed concerns over whether the US economic recovery is capable of being sustained.
These concerns eroded investors’ confidence, leading them to avoid relatively risky assets. Towards the end of the month, trading volumes dwindled as investors awaited the results of the important quarterly Tankan survey of corporate sentiment, which was due for release at the beginning of July.
A survey conducted by the Ministry of Finance and the Cabinet Office’s Economic and Social Research Institute showed that large Japanese manufacturers have become more optimistic about prospects for the business environment. However, towards the end of the month, the strong yen led the share prices of exporting companies to fall.
During the month, Japan’s new prime minister Naoto Kan cautioned that Japan was at risk of “fiscal collapse” if the problems of mounting public debt continue to be neglected. Nevertheless, despite prospects of a programme of measures aimed at reducing public debt, investors did not appear to be excessively disheartened by his warning.
Economic growth expanded during the first quarter of 2010 by a larger-than-expected 5%, year on year. Meanwhile, consumer confidence reached its highest level since October 2007 during May as individuals became more optimistic about the outlook for employment.
Retail sales in Japan grew at their slowest rate since January during May as the effects of fiscal measures to prop up the economy began to diminish. Prices remained on a downward trajectory, falling for a fifteenth consecutive month during May. Minutes from the Bank of Japan’s May meeting showed monetary policy committee members voted unanimously to hold interest rates at 0.1%.
Over the second quarter of 2010 as a whole, the Nikkei 225 posted a drop of more than 15% – Japan’s worst quarterly performance since late 2008, following the collapse of Lehman Brothers. According to data from the Investment Management Association (IMA), Japanese equity funds were out of favour with investors during May, and both Japan and Japan Smaller Companies figured among the worst-performing IMA sectors during that month.
The Nikkei 225 Average index fell by 4% over June, the third consecutive month in which the benchmark index had declined. Unexpectedly disappointing consumer confidence and unemployment figures from the US weighed on share prices in Japan – and across the world – amid renewed concerns over whether the US economic recovery is capable of being sustained.
These concerns eroded investors’ confidence, leading them to avoid relatively risky assets. Towards the end of the month, trading volumes dwindled as investors awaited the results of the important quarterly Tankan survey of corporate sentiment, which was due for release at the beginning of July.
A survey conducted by the Ministry of Finance and the Cabinet Office’s Economic and Social Research Institute showed that large Japanese manufacturers have become more optimistic about prospects for the business environment. However, towards the end of the month, the strong yen led the share prices of exporting companies to fall.
During the month, Japan’s new prime minister Naoto Kan cautioned that Japan was at risk of “fiscal collapse” if the problems of mounting public debt continue to be neglected. Nevertheless, despite prospects of a programme of measures aimed at reducing public debt, investors did not appear to be excessively disheartened by his warning.
Economic growth expanded during the first quarter of 2010 by a larger-than-expected 5%, year on year. Meanwhile, consumer confidence reached its highest level since October 2007 during May as individuals became more optimistic about the outlook for employment.
Retail sales in Japan grew at their slowest rate since January during May as the effects of fiscal measures to prop up the economy began to diminish. Prices remained on a downward trajectory, falling for a fifteenth consecutive month during May. Minutes from the Bank of Japan’s May meeting showed monetary policy committee members voted unanimously to hold interest rates at 0.1%.
Over the second quarter of 2010 as a whole, the Nikkei 225 posted a drop of more than 15% – Japan’s worst quarterly performance since late 2008, following the collapse of Lehman Brothers. According to data from the Investment Management Association (IMA), Japanese equity funds were out of favour with investors during May, and both Japan and Japan Smaller Companies figured among the worst-performing IMA sectors during that month.
US markets decline on Eurozone debt fears
US equity markets began to wobble during May amid concerns Greece might default on the payment of its debts and this sentiment went on to fuel fears other highly indebted countries might find themselves in a similar situation.
Congress put the finishing touches to the most sweeping reform of US financial regulation since the Great Depression of the 1930s. Measures include rigorous limits on banks’ scope to take excessively speculative bets on financial markets, and the creation of a consumer financial protection bureau.
Europe’s debt crisis continues to affect investor sentiment amid fears lower economic growth there might stifle demand for US exports. Meanwhile, closer to home, investors are concerned that state government budget cuts might hamper the US economic recovery.
According to a report by the National Governors Association and the National Association of State Budget Officers, US state governments intend to reduce general expenditure by 6.8% during 2010. The US economy expanded at 2.7% year on year during the first quarter of 2010 – a slower rate than previous estimates of 3% growth.
The unemployment rate fell to 9.5% during June, according to the Labor Department. The US Federal Reserve said the labour market is “improving gradually”, but that consumer spending “remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit”. The Fed went on to warn that bank lending has continued to contract over recent months. Consumer confidence is low and high levels of unemployment have hampered growth in consumer spending.
Wages grew by 0.4% during May, according to the Commerce Department – indeed, wage growth is outstripping consumer spending, which grew by 0.2% during the month. This imbalance should help the population to save money while still spending to support the domestic recovery, particularly as interest rates remain at an extremely low level. Inflation rose by 2% in May on an annualised basis
The manufacturing sector received positive news during the month, as the Institute for Supply Management-Chicago announced its business barometer fell to 59.1 during June. A number over 50 represents growth in the manufacturing sector.
The S&P 500 index registered a decline of 11.9% over the second quarter of 2010, and 7.8% over the first half of the year. North America was the fifth-best-selling IMA sector during May for retail investors, but was one of the worst-performing sectors during the month – although smaller companies slightly outperformed the broad US equity market.
Congress put the finishing touches to the most sweeping reform of US financial regulation since the Great Depression of the 1930s. Measures include rigorous limits on banks’ scope to take excessively speculative bets on financial markets, and the creation of a consumer financial protection bureau.
Europe’s debt crisis continues to affect investor sentiment amid fears lower economic growth there might stifle demand for US exports. Meanwhile, closer to home, investors are concerned that state government budget cuts might hamper the US economic recovery.
According to a report by the National Governors Association and the National Association of State Budget Officers, US state governments intend to reduce general expenditure by 6.8% during 2010. The US economy expanded at 2.7% year on year during the first quarter of 2010 – a slower rate than previous estimates of 3% growth.
The unemployment rate fell to 9.5% during June, according to the Labor Department. The US Federal Reserve said the labour market is “improving gradually”, but that consumer spending “remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit”. The Fed went on to warn that bank lending has continued to contract over recent months. Consumer confidence is low and high levels of unemployment have hampered growth in consumer spending.
Wages grew by 0.4% during May, according to the Commerce Department – indeed, wage growth is outstripping consumer spending, which grew by 0.2% during the month. This imbalance should help the population to save money while still spending to support the domestic recovery, particularly as interest rates remain at an extremely low level. Inflation rose by 2% in May on an annualised basis
The manufacturing sector received positive news during the month, as the Institute for Supply Management-Chicago announced its business barometer fell to 59.1 during June. A number over 50 represents growth in the manufacturing sector.
The S&P 500 index registered a decline of 11.9% over the second quarter of 2010, and 7.8% over the first half of the year. North America was the fifth-best-selling IMA sector during May for retail investors, but was one of the worst-performing sectors during the month – although smaller companies slightly outperformed the broad US equity market.
Will the emergency budget support growth
When George Osborne was photographed with Gladstone’s famous red briefcase, few would have envisaged that the new chancellor would deliver the most radical budget in a generation.
The conservative-liberal coalition had two factors to consider on how to slash Britain’s enormous public debt in such a way not to jeopardise the delicate economic recovery. Will this emergency budget stifle the recovery or help Britain prosper in the future?
Before the election, the Conservatives promised to have an emergency budget within 50 days, in an attempt to bring the UK’s spiralling deficit under control. George Osborne’s budget strategy was to cut spending by 77% and raise taxes by 23%, as he believes that this ratio will best support future economic growth. The main headline of this budget is a substantial increase of 2.5% in VAT to be implemented on the 4th of January 2011. On a personal level it is expected to cost the average UK household £500 a year as the general cost of living will rise. However, it is dependant on how much of the tax is absorbed by the businesses compared with the amount that will be passed on to the consumer. Nevertheless, this tax is likely to hurt businesses and consumers alike but unfortunately due to the regressive nature of the tax it affects the lowest earners disproportionately. On the positive side for the government, it is expected that the rise in VAT will raise £13 billion during the parliament and will make some serious steps in plugging the dangerous hole in the country's finances.
Since the formation of the government it has been anticipated that capital gains tax would rise for the high earners but by how much was the key question. For individuals, the rate of CGT remains at 18%, where their net taxable gains and taxable income are less than the income tax basic rate limit, currently £37,400. The 28% rate applies to gains or parts of gains that exceed that limit. Many experts are suggesting that 250,000 people will be liable for this increase in taxation and it is expected to raise almost a billion in revenue over the term of the government. This will especially hit the middle class buy to let owners, who might find themselves with a large tax bill when they choose to sell their second home.
In the run up to the election the Liberal Democrats were campaigning to increase the personal tax free allowance from £6475 to £10,000, with the view of eliminating income tax for the lowest earners in the economy. With the formation of the coalition government and in the name of compromise, George Osborne raised the threshold by £1000, which lifted 880,000 above the income tax threshold, giving basic rate tax earners an additional £170 a year in their pocket. This focused reduction will definitely benefit the lower earners in society and help to offset the rise in VAT. Furthermore, the additional money will be spent directly in the economy as lower earners spend a higher proportion of their income than the middle and higher classes. Moreover, the raising of the threshold acts as an incentive to low-income earners as they are more rewarded for their work and more willing to work supplementary hours.
The conservative government have been a consistent advocate of the importance of the free market forces and aim to provide a low tax environment that businesses require to grow. With this in mind they have laid out a 5-year plan to reduce the corporation tax by 1% each year. By reducing the tax burden on businesses this will increase profitability of the firms, which the government is hoping will spur entrepreneurialism. Furthermore, by 2015, the UK will have the lowest rate of corporation tax within the G7, which will make the UK economy a prime location for multinational companies to operate in. With this in mind, Mr Osborne raised the limit for entrepreneur’s discounted rate of taxation to £5 million in an effort to make business owners more willing to expand their businesses.
George Osborne described his first budget as ‘the unavoidable Budget’ designed to reduce the long-term debt the UK faces. In this budget he lays down plans for some of the biggest cuts in public spending since the end of World War 2. He planned to shave £6.2 billion off spending this year and left the door open for further cuts in the future. These cuts include a reduction in child tax credits, a public sector pay freeze, housing benefits and the abolishment of various new spending programmes launched by the previous government. However, these cuts in public spending will have a negative effect on the rate of economic growth in the country, as government spending is a key component in gross domestic product (GDP - a measurement of production of the whole economy). This idea is echoed by the newly-formed Office for Budget Responsibility (OBR), which has downgraded the economic growth projections in light of the new budget from 2.6% to 2.3% over 2011 -2012. Furthermore, the OBR predicts that the new budget will be worse for jobs over the next five years, as the heavy cuts in public services will lead to redundancies across the public sector workforce.
Overall, this budget has improved investors’ confidence in the country’s ability to repay its debt, with the rating agency suggesting that the UK will continue to maintain its prized triple A rating. Only time will tell whether or not the George Osborne’s first budget will successfully lead the UK economy out of recession.
The conservative-liberal coalition had two factors to consider on how to slash Britain’s enormous public debt in such a way not to jeopardise the delicate economic recovery. Will this emergency budget stifle the recovery or help Britain prosper in the future?
Before the election, the Conservatives promised to have an emergency budget within 50 days, in an attempt to bring the UK’s spiralling deficit under control. George Osborne’s budget strategy was to cut spending by 77% and raise taxes by 23%, as he believes that this ratio will best support future economic growth. The main headline of this budget is a substantial increase of 2.5% in VAT to be implemented on the 4th of January 2011. On a personal level it is expected to cost the average UK household £500 a year as the general cost of living will rise. However, it is dependant on how much of the tax is absorbed by the businesses compared with the amount that will be passed on to the consumer. Nevertheless, this tax is likely to hurt businesses and consumers alike but unfortunately due to the regressive nature of the tax it affects the lowest earners disproportionately. On the positive side for the government, it is expected that the rise in VAT will raise £13 billion during the parliament and will make some serious steps in plugging the dangerous hole in the country's finances.
Since the formation of the government it has been anticipated that capital gains tax would rise for the high earners but by how much was the key question. For individuals, the rate of CGT remains at 18%, where their net taxable gains and taxable income are less than the income tax basic rate limit, currently £37,400. The 28% rate applies to gains or parts of gains that exceed that limit. Many experts are suggesting that 250,000 people will be liable for this increase in taxation and it is expected to raise almost a billion in revenue over the term of the government. This will especially hit the middle class buy to let owners, who might find themselves with a large tax bill when they choose to sell their second home.
In the run up to the election the Liberal Democrats were campaigning to increase the personal tax free allowance from £6475 to £10,000, with the view of eliminating income tax for the lowest earners in the economy. With the formation of the coalition government and in the name of compromise, George Osborne raised the threshold by £1000, which lifted 880,000 above the income tax threshold, giving basic rate tax earners an additional £170 a year in their pocket. This focused reduction will definitely benefit the lower earners in society and help to offset the rise in VAT. Furthermore, the additional money will be spent directly in the economy as lower earners spend a higher proportion of their income than the middle and higher classes. Moreover, the raising of the threshold acts as an incentive to low-income earners as they are more rewarded for their work and more willing to work supplementary hours.
The conservative government have been a consistent advocate of the importance of the free market forces and aim to provide a low tax environment that businesses require to grow. With this in mind they have laid out a 5-year plan to reduce the corporation tax by 1% each year. By reducing the tax burden on businesses this will increase profitability of the firms, which the government is hoping will spur entrepreneurialism. Furthermore, by 2015, the UK will have the lowest rate of corporation tax within the G7, which will make the UK economy a prime location for multinational companies to operate in. With this in mind, Mr Osborne raised the limit for entrepreneur’s discounted rate of taxation to £5 million in an effort to make business owners more willing to expand their businesses.
George Osborne described his first budget as ‘the unavoidable Budget’ designed to reduce the long-term debt the UK faces. In this budget he lays down plans for some of the biggest cuts in public spending since the end of World War 2. He planned to shave £6.2 billion off spending this year and left the door open for further cuts in the future. These cuts include a reduction in child tax credits, a public sector pay freeze, housing benefits and the abolishment of various new spending programmes launched by the previous government. However, these cuts in public spending will have a negative effect on the rate of economic growth in the country, as government spending is a key component in gross domestic product (GDP - a measurement of production of the whole economy). This idea is echoed by the newly-formed Office for Budget Responsibility (OBR), which has downgraded the economic growth projections in light of the new budget from 2.6% to 2.3% over 2011 -2012. Furthermore, the OBR predicts that the new budget will be worse for jobs over the next five years, as the heavy cuts in public services will lead to redundancies across the public sector workforce.
Overall, this budget has improved investors’ confidence in the country’s ability to repay its debt, with the rating agency suggesting that the UK will continue to maintain its prized triple A rating. Only time will tell whether or not the George Osborne’s first budget will successfully lead the UK economy out of recession.
Oil Spill affects UK income funds
The UK Equity Income sector had started to look as if it had put the troubles of the past two years behind it.
At the beginning of May, it was comfortably ahead of the UK All Companies grouping for the year to date as investors had sought out defensives in an increasingly uncertain economic climate. However, that all changed in May with the BP disaster.The FTSE 350 High Yield index dropped 7.6% for the month, compared to a fall of 5.8% in the FTSE Low Yield index. Much of this drop could be attributed to BP, the largest dividend payer in the FTSE 100, which tumbled 10% over the month. Its failure to stem the oil spill in the Gulf of Mexico has analysts fearing for its survival as an independent business.
For many equity income managers, BP is a key holding in their portfolio and its problems represent a significant blow. Adviser group BestInvest has calculated that up to 40% of equity income funds have BP as their largest holding. Some, such as Neil Woodford at Invesco Perpetual, had already sold out based on weakness in the oil price, but these are the exceptions. BP has pledged to retain its dividend, which currently makes up around 15% of the overall yield on the Footsie, but if the situation in the Gulf of Mexico deteriorates further, it may find its hand forced.
May was also a tumultuous month for another big dividend provider – Prudential. Its planned AIA deal was scuppered by shareholders who did not like the price it was paying for the assets and feared capital adequacy requirements from the FSA would hamper its ability to pay a dividend. As it was, the company spent almost as much on professional fees surrounding the failed merger than it did on its dividend last year. Its shares have rallied since the deal was called off, but are still flat on the start of May.
Elsewhere, BT pleased markets by committing itself to a “progressive” dividend policy over the next three years. Storage group Big Yellow also surprised by resuming its dividend on the back of a stronger outlook while engineering group Aveva doubled its final payout.
The weakness in BP pushed the UK Equity Income sector below that of the UK All Companies grouping for 2010. The average equity income fund has now dropped 2.72% over the year to date, compared to a fall in the average UK All Companies fund of 2.21% and in the average UK Equity Income & Growth fund of 2.62%.
At the beginning of May, it was comfortably ahead of the UK All Companies grouping for the year to date as investors had sought out defensives in an increasingly uncertain economic climate. However, that all changed in May with the BP disaster.The FTSE 350 High Yield index dropped 7.6% for the month, compared to a fall of 5.8% in the FTSE Low Yield index. Much of this drop could be attributed to BP, the largest dividend payer in the FTSE 100, which tumbled 10% over the month. Its failure to stem the oil spill in the Gulf of Mexico has analysts fearing for its survival as an independent business.
For many equity income managers, BP is a key holding in their portfolio and its problems represent a significant blow. Adviser group BestInvest has calculated that up to 40% of equity income funds have BP as their largest holding. Some, such as Neil Woodford at Invesco Perpetual, had already sold out based on weakness in the oil price, but these are the exceptions. BP has pledged to retain its dividend, which currently makes up around 15% of the overall yield on the Footsie, but if the situation in the Gulf of Mexico deteriorates further, it may find its hand forced.
May was also a tumultuous month for another big dividend provider – Prudential. Its planned AIA deal was scuppered by shareholders who did not like the price it was paying for the assets and feared capital adequacy requirements from the FSA would hamper its ability to pay a dividend. As it was, the company spent almost as much on professional fees surrounding the failed merger than it did on its dividend last year. Its shares have rallied since the deal was called off, but are still flat on the start of May.
Elsewhere, BT pleased markets by committing itself to a “progressive” dividend policy over the next three years. Storage group Big Yellow also surprised by resuming its dividend on the back of a stronger outlook while engineering group Aveva doubled its final payout.
The weakness in BP pushed the UK Equity Income sector below that of the UK All Companies grouping for 2010. The average equity income fund has now dropped 2.72% over the year to date, compared to a fall in the average UK All Companies fund of 2.21% and in the average UK Equity Income & Growth fund of 2.62%.
Emerging markets fall on European debt crisis
Emerging markets suffered in May as risk aversion became the order of the day for investors.
The eurozone crisis proved more important than a raft of positive economic data coming out of the BRIC economies, though the markets were also hit by increasingly onerous government measures to tackle excessive growth. Overall, the MSCI Emerging Markets index was down 6.7% in May, putting it in line with the FTSE 100 (down 6.6%) and just ahead of the S&P 500 (down 8.4%). Eastern Europe was the worst-performing region, with the MSCI Emerging Europe index down 8.4% over the month after a particularly weak showing from the Hungarian markets. The MSCI Latin America, Asia, and Far East indices all fell in line – down 6.73%, 6.81% and 7.18% respectively over the month.
The Chinese market had its weakest month since September 2009 after the Chinese cabinet approved a plan to reform the country’s property tax regime. Property companies are well-represented in the Chinese index and had already been hurt by government measures to bring in higher down-payments and mortgage rates.
Nevertheless, the wider Chinese economy is still growing at speed, with the latest GDP figures showing a rise of 11.9%. The country is also spreading its largesse – Taiwan saw its fastest growth in 30 years, primarily on the back of surging computer chip and display panels to China. It enjoyed GDP growth of 13.3% in the three months to 31 March 2010 and a 62% rise in exports to China in April.
India also saw strong GDP growth – up 8.6% for the three months to 31 March 2010. This was in line with estimates, but raised fears of interest rate rises as the country’s benchmark inflation is around three times that of China. However, the eurozone represents around one-fifth of exports, so this may dampen inflationary pressures. The S&P CNX index was one of the month’s best-performing, down just 2.8%.
Russia finally emerged from the doldrums. Its economy expanded for the first time since 2008 in the first quarter, rising 2.9%. This was lower than expectations, but nonetheless an important turnaround. It is being helped by the sustained strength in the oil price and the government’s $100bn (£68bn) stimulus. However, the Russian RTS index had a dismal month, falling 11.9%.
Brazil is showing signs of above-expectation growth with lending on the increase and construction costs rising and indeed the OECD raised its growth forecasts for the country during the month. The country raised rates in May and is likely to raise them again in June when first quarter GDP data is revealed.
The eurozone crisis proved more important than a raft of positive economic data coming out of the BRIC economies, though the markets were also hit by increasingly onerous government measures to tackle excessive growth. Overall, the MSCI Emerging Markets index was down 6.7% in May, putting it in line with the FTSE 100 (down 6.6%) and just ahead of the S&P 500 (down 8.4%). Eastern Europe was the worst-performing region, with the MSCI Emerging Europe index down 8.4% over the month after a particularly weak showing from the Hungarian markets. The MSCI Latin America, Asia, and Far East indices all fell in line – down 6.73%, 6.81% and 7.18% respectively over the month.
The Chinese market had its weakest month since September 2009 after the Chinese cabinet approved a plan to reform the country’s property tax regime. Property companies are well-represented in the Chinese index and had already been hurt by government measures to bring in higher down-payments and mortgage rates.
Nevertheless, the wider Chinese economy is still growing at speed, with the latest GDP figures showing a rise of 11.9%. The country is also spreading its largesse – Taiwan saw its fastest growth in 30 years, primarily on the back of surging computer chip and display panels to China. It enjoyed GDP growth of 13.3% in the three months to 31 March 2010 and a 62% rise in exports to China in April.
India also saw strong GDP growth – up 8.6% for the three months to 31 March 2010. This was in line with estimates, but raised fears of interest rate rises as the country’s benchmark inflation is around three times that of China. However, the eurozone represents around one-fifth of exports, so this may dampen inflationary pressures. The S&P CNX index was one of the month’s best-performing, down just 2.8%.
Russia finally emerged from the doldrums. Its economy expanded for the first time since 2008 in the first quarter, rising 2.9%. This was lower than expectations, but nonetheless an important turnaround. It is being helped by the sustained strength in the oil price and the government’s $100bn (£68bn) stimulus. However, the Russian RTS index had a dismal month, falling 11.9%.
Brazil is showing signs of above-expectation growth with lending on the increase and construction costs rising and indeed the OECD raised its growth forecasts for the country during the month. The country raised rates in May and is likely to raise them again in June when first quarter GDP data is revealed.
What is best an ISA or a SIPP?
With longer life expectancies many investors are concerned about their retirement income.
Some are now looking to boost their pension funds, either by topping up company schemes, or by using alternative vehicles.One such vehicle is the Individual Savings Account (ISA) which could help to ensure your retirement income is as healthy as possible. ISAs and pension plans are both seen as tax efficient investment vehicles. However, there are big differences between the two. For example, when you put money into your pension plan, the contribution qualifies for a tax rebate at your marginal rate which, for a higher rate taxpayer, can add a significant amount to their investment. However, in exchange for this benefit, you must keep your money invested until at least age 55, and on retirement, the income you receive back is taxable, and counts towards your personal allowances.
With an ISA, the money you invest comes from taxed income and no rebate will be given. However, ISAs have no minimum term - so you can withdraw the proceeds or an income at any time you like. In addition, any income you do withdraw will be tax free and will not count towards any personal allowances. Which approach is best for you depends entirely on your personal situation. Perhaps the healthiest way to approach it is to combine the two.
Some are now looking to boost their pension funds, either by topping up company schemes, or by using alternative vehicles.One such vehicle is the Individual Savings Account (ISA) which could help to ensure your retirement income is as healthy as possible. ISAs and pension plans are both seen as tax efficient investment vehicles. However, there are big differences between the two. For example, when you put money into your pension plan, the contribution qualifies for a tax rebate at your marginal rate which, for a higher rate taxpayer, can add a significant amount to their investment. However, in exchange for this benefit, you must keep your money invested until at least age 55, and on retirement, the income you receive back is taxable, and counts towards your personal allowances.
With an ISA, the money you invest comes from taxed income and no rebate will be given. However, ISAs have no minimum term - so you can withdraw the proceeds or an income at any time you like. In addition, any income you do withdraw will be tax free and will not count towards any personal allowances. Which approach is best for you depends entirely on your personal situation. Perhaps the healthiest way to approach it is to combine the two.
Eurozone crisis spreads
May saw the eurozone crisis building momentum, with some analysts going as far as to doubt whether the euro could remain as a single currency.
With Greece now having sufficient bailout funds to see it through its short-term needs, focus has turned to how the bailout might affect those countries that were providing the cash. Specifically, with economic recovery still fragile, could the price of the Greek bailout be recovery in Europe?
The new phase of the crisis was not reflected in relative market performance, largely because eurozone markets have already dropped significantly this year. The FTSE Eurofirst index was down 5.8% in May, which actually made it the strongest performer of the major markets. The FTSE 100 was down 6.6%, the S&P 500 down 8.4% and the Nikkei down 10%. The major markets of France and Germany saw disparate performance. France’s CAC 40 dropped just 2.3%, while the German Dax was among the worst-performing of all major markets, falling 11%.
In spite of this relatively strong performance, the Europe ex UK sector is still the worst-performing for the year, dropping 11.2% over the year to date. Investors would have been marginally better off in the European Smaller Companies sector, where funds have only fallen 5.8% on average.
There are, of course, plenty of reasons to be concerned about the situation in the eurozone. Among the bad news last month was Spain’s downgrade by Fitch, who cited its “poor growth prospects”. This came in spite of its €15bn (£12.5bn) austerity programme, designed to rein in its deficit. Meanwhile the IMF issued a report that was highly critical of eurozone governments and urged action to stave off disaster. It said “far-reaching reforms were necessary” and singled out Spain for its “dysfunctional labour market and banking sector”.
Yet the economic statistics do not yet reflect the difficulties of the situation. GDP growth between January and March was weak but, at 0.2%, not disastrous. Italy saw the fastest growth, rising 0.5%. Spain managed an anaemic 0.1%, while Germany reversed its weak last quarter with growth of 0.2%. It is a long way off the figures for the US (0.8%), but it does not suggest a crisis.
Jean-Claude Trichet, president of the European Central Bank, said in an interview with French newspaper La Monde that second-quarter growth was coming in higher than expectations. New industrial orders were up 5.2% in March over February and 19.8% up on March 2009. Inflation remains under control. The biggest problem is consumer spending, which will need to improve before recovery can take hold. Sentiment indicators issued at the end of the month showed the sharpest dip in consumer sentiment since 2008. As such, there is plenty of reason to be pessimistic about the outlook for the continent.
With Greece now having sufficient bailout funds to see it through its short-term needs, focus has turned to how the bailout might affect those countries that were providing the cash. Specifically, with economic recovery still fragile, could the price of the Greek bailout be recovery in Europe?
The new phase of the crisis was not reflected in relative market performance, largely because eurozone markets have already dropped significantly this year. The FTSE Eurofirst index was down 5.8% in May, which actually made it the strongest performer of the major markets. The FTSE 100 was down 6.6%, the S&P 500 down 8.4% and the Nikkei down 10%. The major markets of France and Germany saw disparate performance. France’s CAC 40 dropped just 2.3%, while the German Dax was among the worst-performing of all major markets, falling 11%.
In spite of this relatively strong performance, the Europe ex UK sector is still the worst-performing for the year, dropping 11.2% over the year to date. Investors would have been marginally better off in the European Smaller Companies sector, where funds have only fallen 5.8% on average.
There are, of course, plenty of reasons to be concerned about the situation in the eurozone. Among the bad news last month was Spain’s downgrade by Fitch, who cited its “poor growth prospects”. This came in spite of its €15bn (£12.5bn) austerity programme, designed to rein in its deficit. Meanwhile the IMF issued a report that was highly critical of eurozone governments and urged action to stave off disaster. It said “far-reaching reforms were necessary” and singled out Spain for its “dysfunctional labour market and banking sector”.
Yet the economic statistics do not yet reflect the difficulties of the situation. GDP growth between January and March was weak but, at 0.2%, not disastrous. Italy saw the fastest growth, rising 0.5%. Spain managed an anaemic 0.1%, while Germany reversed its weak last quarter with growth of 0.2%. It is a long way off the figures for the US (0.8%), but it does not suggest a crisis.
Jean-Claude Trichet, president of the European Central Bank, said in an interview with French newspaper La Monde that second-quarter growth was coming in higher than expectations. New industrial orders were up 5.2% in March over February and 19.8% up on March 2009. Inflation remains under control. The biggest problem is consumer spending, which will need to improve before recovery can take hold. Sentiment indicators issued at the end of the month showed the sharpest dip in consumer sentiment since 2008. As such, there is plenty of reason to be pessimistic about the outlook for the continent.
Japan suffers big sell off
The Nikkei reversed its recent strong run of form in May, sliding 10% over the month to leave it the worst-performing developed market index,barring the German Dax.
Japan’s markets were driven down by the fear that the country’s export-led recovery could be derailed by the difficulties in the eurozone.Ostensibly, much of the economic news from Japan was good. First-quarter nominal GDP growth of 1.2% marked a second consecutive quarter of growth – a rarity in Japan. The figures showed an improvement in exports to emerging Asia, particularly for new cars and high-tech products, reinforcing the view that Japan may be an increasing beneficiary of Asian growth.
However, the problem is the continued reliance on exports. Only a tiny proportion of the pick-up in GDP could be attributed to private consumption despite a rise in salaries as deflation continues to push the Japanese to hoard cash rather than spend it. The new government has introduced a Y13,000 (£95) monthly child allowance payment, designed to boost consumption. As the first of its kind, it may have the desired effect and stop the Japanese saving rather than spending, but history suggests this is unlikely.
There is a question mark over the continued strength of exports. Although the Japanese economy is more geared to the strength of the US and China, the eurozone is still an important market for its goods. As a result, the Japanese economy may slow between April and June because exports are not sufficiently supportive of growth.
The real hope for the Japanese economy may come from its monetary policy. The government may continue to operate a loose monetary policy through low interest rates and quantitative easing just as many other governments are tightening. This should finally weaken the stubbornly robust yen, support the exporters and help with debt financing.
The government is due to reveal its fiscal consolidation plan in June. The IMF has said it is “critical” that a credible plan is formed. Government debt is still vastly higher than for any other developed country and while the government is still in a position to service the debt for the time being, the situation is unsustainable in the longer term.
Japanese funds, in contrast, are still riding high. The average fund in the Japan sector has returned 11.9% for investors, over the year to date. The smaller companies sector has done even better, returning an average of 13.7% since January, leaving it comfortably the best performing sector in 2010. The UK All Companies sector, by comparison, has fallen 4.88% in that time.
Japan’s markets were driven down by the fear that the country’s export-led recovery could be derailed by the difficulties in the eurozone.Ostensibly, much of the economic news from Japan was good. First-quarter nominal GDP growth of 1.2% marked a second consecutive quarter of growth – a rarity in Japan. The figures showed an improvement in exports to emerging Asia, particularly for new cars and high-tech products, reinforcing the view that Japan may be an increasing beneficiary of Asian growth.
However, the problem is the continued reliance on exports. Only a tiny proportion of the pick-up in GDP could be attributed to private consumption despite a rise in salaries as deflation continues to push the Japanese to hoard cash rather than spend it. The new government has introduced a Y13,000 (£95) monthly child allowance payment, designed to boost consumption. As the first of its kind, it may have the desired effect and stop the Japanese saving rather than spending, but history suggests this is unlikely.
There is a question mark over the continued strength of exports. Although the Japanese economy is more geared to the strength of the US and China, the eurozone is still an important market for its goods. As a result, the Japanese economy may slow between April and June because exports are not sufficiently supportive of growth.
The real hope for the Japanese economy may come from its monetary policy. The government may continue to operate a loose monetary policy through low interest rates and quantitative easing just as many other governments are tightening. This should finally weaken the stubbornly robust yen, support the exporters and help with debt financing.
The government is due to reveal its fiscal consolidation plan in June. The IMF has said it is “critical” that a credible plan is formed. Government debt is still vastly higher than for any other developed country and while the government is still in a position to service the debt for the time being, the situation is unsustainable in the longer term.
Japanese funds, in contrast, are still riding high. The average fund in the Japan sector has returned 11.9% for investors, over the year to date. The smaller companies sector has done even better, returning an average of 13.7% since January, leaving it comfortably the best performing sector in 2010. The UK All Companies sector, by comparison, has fallen 4.88% in that time.
America economy continues to grow
The US economy may have had to revise down its first-quarter GDP growth figures but it began to feel like a model of economic strength compared with its developed market peers.
The Commerce Department said the economy expanded at an annualised rate of 3% in the first three months of the year, rather than its original estimates of 3.2%.It was the third quarter in a row of GDP expansion and, while the pace of growth is clearly slowing, there were clear reasons for optimism. It seems that economic growth is rebalancing away from consumer spending and into industrial production. Manufacturing grew at a faster pace than forecast in the first quarter – both through strong demand for exports and a revival in domestic orders. The Institute for Supply Management said export demand was the highest in 20 years.
Less encouraging were the jobless figures, which showed that US unemployment rose from 9.7% in March to 9.9% in April. This has raised the spectre of a ‘jobless recovery’ and may be acting to depress consumer spending statistics. Although last month’s retail sales figures were higher than expected, analysts pointed to the weak underlying trend. Overall sales were boosted by building materials and gardening equipment, where sales were skewed by incentive programmes.
There is also some danger in being top of the heap. The dollar appreciated further against the euro during the month, ending it at €1.22 to the dollar. It has also remained strong against sterling ending the month at $1.45 to the pound. The US now runs the risk its stronger currency derails its nascent export recovery.
In spite of the relative strength of the US economy, its markets had a weak month. The S&P 500 was down 8.4%, compared to falls of 6.6% in the FTSE 100 and 5.8% in the FTSE Eurofirst. The technology-focused Nasdaq also had a torrid month, dropping 8.7%.
The North America fund sector is still one of the best-performing over the year to date and is second only to Japan among the major markets. The average fund in the sector has delivered 7.73% since the start of the year, compared to a fall of 2.21% in the UK All Companies sector. However, that masks a huge disparity in performance from the underlying funds – the top fund has delivered 21.23% to investors, while the bottom fund has lost 11.58%. Meanwhile the North American Smaller Companies sector has returned an average of 15.86% to unitholders since January.
The Commerce Department said the economy expanded at an annualised rate of 3% in the first three months of the year, rather than its original estimates of 3.2%.It was the third quarter in a row of GDP expansion and, while the pace of growth is clearly slowing, there were clear reasons for optimism. It seems that economic growth is rebalancing away from consumer spending and into industrial production. Manufacturing grew at a faster pace than forecast in the first quarter – both through strong demand for exports and a revival in domestic orders. The Institute for Supply Management said export demand was the highest in 20 years.
Less encouraging were the jobless figures, which showed that US unemployment rose from 9.7% in March to 9.9% in April. This has raised the spectre of a ‘jobless recovery’ and may be acting to depress consumer spending statistics. Although last month’s retail sales figures were higher than expected, analysts pointed to the weak underlying trend. Overall sales were boosted by building materials and gardening equipment, where sales were skewed by incentive programmes.
There is also some danger in being top of the heap. The dollar appreciated further against the euro during the month, ending it at €1.22 to the dollar. It has also remained strong against sterling ending the month at $1.45 to the pound. The US now runs the risk its stronger currency derails its nascent export recovery.
In spite of the relative strength of the US economy, its markets had a weak month. The S&P 500 was down 8.4%, compared to falls of 6.6% in the FTSE 100 and 5.8% in the FTSE Eurofirst. The technology-focused Nasdaq also had a torrid month, dropping 8.7%.
The North America fund sector is still one of the best-performing over the year to date and is second only to Japan among the major markets. The average fund in the sector has delivered 7.73% since the start of the year, compared to a fall of 2.21% in the UK All Companies sector. However, that masks a huge disparity in performance from the underlying funds – the top fund has delivered 21.23% to investors, while the bottom fund has lost 11.58%. Meanwhile the North American Smaller Companies sector has returned an average of 15.86% to unitholders since January.
Weakness in Eurozone affects UK equities
May saw UK All Companies funds squeak ahead of the UK Equity Income sector for the first time this year as managers in the latter grouping were hit by the problems at BP.
The FTSE 350 Low Yield index dipped 5.8% over the month, while the equivalent High Yield index fell 7.6%. That said, the UK All Companies sector has still been one of the worst-performing of all the major markets in 2010. Since the start of the year, it has dipped 2.21%, compared to rises of 7.73% for North America and 11.57% for Japan. Only the eurozone – unsurprisingly – has performed worse, with the average Europe excluding UK fund down 9.66% since January.
The FTSE 100 was one of the better performing markets in May, down ‘just’ 6.6%, compared to falls of 8.4% for the S&P 500 and 10% for the Nikkei. However, this was more by virtue of relative inactivity after the volatility surrounding the election, than any obvious signs of strength.
Some more optimistic signals did emanate from the UK economy. GDP figures for the first three months of the year were revised up from 0.2% to 0.3% while output was given a boost by a strong rebound in industrial production and business services. This latter point cheered some economists who took it as a sign the UK economy was finally rebalancing away from a reliance on consumer spending into industrial production. Industrial output showed growth of 1.2%, compared to a previous estimate of 0.7%.
The first moves by the new coalition Government to rein in public spending were announced. The moves to cut £6.2bn from the public purse were welcomed by rating agencies and more cuts are expected in the Budget on 22 June.
Even so, this did not stop the OECD issuing a surprise warning on interest rates. The organisation said UK rates needed to rise to 3.5% by the end of 2011 in order to stave off increasingly insistent inflationary pressures. The comments were robustly dismissed by many economists, who believe raising rates at the same time as tax rises and cuts in public spending would be suicidal for any recovery.
The UK’s biggest problem at the moment is the weakness of the eurozone, which remains its biggest trading partner, meaning its current problems could destabilise the UK’s anaemic recovery. Any significant deterioration in the euro may also hamper the competitiveness of British exports, which have benefited from the consistent weakness of sterling.
The FTSE 350 Low Yield index dipped 5.8% over the month, while the equivalent High Yield index fell 7.6%. That said, the UK All Companies sector has still been one of the worst-performing of all the major markets in 2010. Since the start of the year, it has dipped 2.21%, compared to rises of 7.73% for North America and 11.57% for Japan. Only the eurozone – unsurprisingly – has performed worse, with the average Europe excluding UK fund down 9.66% since January.
The FTSE 100 was one of the better performing markets in May, down ‘just’ 6.6%, compared to falls of 8.4% for the S&P 500 and 10% for the Nikkei. However, this was more by virtue of relative inactivity after the volatility surrounding the election, than any obvious signs of strength.
Some more optimistic signals did emanate from the UK economy. GDP figures for the first three months of the year were revised up from 0.2% to 0.3% while output was given a boost by a strong rebound in industrial production and business services. This latter point cheered some economists who took it as a sign the UK economy was finally rebalancing away from a reliance on consumer spending into industrial production. Industrial output showed growth of 1.2%, compared to a previous estimate of 0.7%.
The first moves by the new coalition Government to rein in public spending were announced. The moves to cut £6.2bn from the public purse were welcomed by rating agencies and more cuts are expected in the Budget on 22 June.
Even so, this did not stop the OECD issuing a surprise warning on interest rates. The organisation said UK rates needed to rise to 3.5% by the end of 2011 in order to stave off increasingly insistent inflationary pressures. The comments were robustly dismissed by many economists, who believe raising rates at the same time as tax rises and cuts in public spending would be suicidal for any recovery.
The UK’s biggest problem at the moment is the weakness of the eurozone, which remains its biggest trading partner, meaning its current problems could destabilise the UK’s anaemic recovery. Any significant deterioration in the euro may also hamper the competitiveness of British exports, which have benefited from the consistent weakness of sterling.