This week the International Monetary Fund (IMF) released data and forecasts predicating that the global economy will grow at approximately 4.8% this year. This is far above global trends of the last 10 years, which typically lies within the region of 3.7% –4.2% range and is exactly what you would expect from a recovering global economy. Nevertheless, the IMF revised down growth rates for the major developed nations such as the UK, US, Eurozone and Japan, suggesting that these advanced economies will contribute less to economic growth. With emerging markets still expanding rapidly will there be a time when the global economic power shifts towards these emerging nations?
Developed nations are currently in a rather sticky position, with most of their economies forecasting below trend growth rates for the next couple of years. The high levels of government debt further exacerbate this problem, leaving most governments unable to provide the economic assistance their countries require. Most advanced economies are currently undergoing massive austerity measures, which will reduce approximately 1.25% of their combined growth in 2011. This is the largest ever fiscal tightening and could further jeopardise future growth for the advanced economies. These advanced economies are also facing the mammoth task of generating large numbers of jobs, especially when facing record high unemployment rates such as those in the US and Eurozone, that have now reached 9.6% and 10.1%.
In comparison, the emerging market nations such as Brazil, Russia, India and China (BRICs) are all enjoying high levels of growth, almost too fast, with most introducing measures in an attempt to slow down their rapidly expanding economies. The growth of their economies is fundamentally transforming their working class by increasing the general standard of living for the average citizen and providing them with newfound purchasing power. The expansion of the consumer classes in these countries has helped them grow independently of the global economy. In further contrast to developed nations, the level of public debt in the majority of emerging nations is insignificant in comparison to their more advanced counterparts. This allows them to operate a more business-friendly environment of low taxation and increased spending on public services and infrastructure.
However, we are currently living in the era of globalisation and it would be naïve to believe that the fate of the emerging markets and developed economies is not intertwined. The growth stories in the emerging markets directly benefits international companies and their host nations. Furthermore, the cheap labour costs and resources that the emerging markets possess make it possible for international companies to produce goods more cheaply, lowering the rate of inflation across the developed nations. While emerging markets are clearly better suited to the current economic environment they are all generally dependant on strength of the developed nations’ consumers to purchase their exports and raw materials.
With the divergence of growth rates between the advanced economies and emerging markets it is not difficult to imagine that emerging markets will play a more important role on the global stage, both economically and politically. Even so, it is highly unlikely that emerging markets will grow smoothly and they are likely to undergo many setbacks themselves.
Tuesday, 26 October 2010
Thursday, 21 October 2010
Market Review
Global equity markets resumed their rally in September that helped the FTSE gain an impressive 6.27%. The main cause of this upward movement was better than expected economic news from the Eurozone, US and the UK, which eased many investors’ fears of a double dip recession.
Ever since the global economy dragged itself out of recession late last year, there has always been a niggling feeling in the back of many economists’ minds that the economic recovery was not sustainable. Nevertheless, confidence remained high during the first half of this year; the global economic picture was far brighter than economists had forecasted during the darkest days of the recession. However, during the summer the niggling sensation started to return as US and Eurozone economies showed signs of weakening. During September better than expected economic news indicated to many investors that the rate of growth but would still remain in positive territory, which abated fears of a double dip recession.
With the slowing pace of the Japanese, US, Euro and the UK economies it was only a matter of time until central banks started to speculate whether or not to print more money and buy government debt with it (Quantitative Easing). During September these central banks have all made statements highlighting the difficulties facing the global economy and their willingness to resume QE. The good news is that the central banks have identified that the banking system is still limping along and it will be another couple of years until it reaches suitable strength to fully support a recovery. However, the impact of the next round of QE will be limited as government bond yields are already at a historical low; therefore, it will be difficult to imagine that this additional money will have much affect on the system. Nevertheless, the news of possible QE helped equities rally during September.
Ever since the global economy dragged itself out of recession late last year, there has always been a niggling feeling in the back of many economists’ minds that the economic recovery was not sustainable. Nevertheless, confidence remained high during the first half of this year; the global economic picture was far brighter than economists had forecasted during the darkest days of the recession. However, during the summer the niggling sensation started to return as US and Eurozone economies showed signs of weakening. During September better than expected economic news indicated to many investors that the rate of growth but would still remain in positive territory, which abated fears of a double dip recession.
With the slowing pace of the Japanese, US, Euro and the UK economies it was only a matter of time until central banks started to speculate whether or not to print more money and buy government debt with it (Quantitative Easing). During September these central banks have all made statements highlighting the difficulties facing the global economy and their willingness to resume QE. The good news is that the central banks have identified that the banking system is still limping along and it will be another couple of years until it reaches suitable strength to fully support a recovery. However, the impact of the next round of QE will be limited as government bond yields are already at a historical low; therefore, it will be difficult to imagine that this additional money will have much affect on the system. Nevertheless, the news of possible QE helped equities rally during September.
Wednesday, 20 October 2010
Diversity and Asset Allocation
This is also the first rule of investing but worth reaffirming. Different asset classes perform well or poorly at different times. If your portfolio is exposed to a single asset class – say, equities – its performance will follow the fortunes of only the equity market, and returns could be volatile. However, if your portfolio contains a selection of different asset classes, and is also spread across different countries and regions of the world, the different elements will perform differently – so if one is doing badly, the chances are another will do better and compensate for some of the downside.
Tuesday, 19 October 2010
Start saving for your pension early
Advances in medicine and in living standards mean we are now living longer than ever before. Indeed, according to New Scientist magazine, half the people who have ever reached the age of 65 - in the entire history of mankind - are alive today and estimates of life expectancy suggest that the average female born today will live a staggering 91 years.
All of this is great news for us as individuals as it offers the prospect of a longer, healthier and happier life. However, before you start dreaming of such a retirement, with endless games of golf, decades of holidays and extended time with the grandchildren, its worth considering how you are going to pay for it.
These raised expectations for our older age mean that saving for our retirement is perhaps more important than ever – but also, the earlier you start, the easier it is. Indeed, the money you save between the ages of 25 and 35 could account for half the amount you get back when you reach 65 so even if retirement seems no more than a distant dream, doing something proactive could really benefit you long term.
The reason for this is compound interest – that is, the way in which interest you earn on your money begins to earn interest on itself. For example: if you invest £5,000 and leave it for five years at an interest rate of 5% pa then, at the end of 5 years, you will have £6,381. 5% of this initial £5,000 would be £250 a year – a total of £1,250 – but the money actually earns £1,381. This additional £131 is the amount earned by the interest itself. Simply by leaving the interest you earn invested, you can earn even more interest - for no additional outlay whatsoever.
The best thing about compound interest though is, the longer it is left to work, the more impressive the figures become. If you left that £5,000 invested for 10 years, your total return would be £8,144 - £644 of which would be entirely down to the interest earning interest. Turn the calculation around and you find that if you want to achieve a pension fund value of £100,000, assuming an interest rate of 6% pa after charges, it would cost £50 a month from age 25, but doubles to £100 a month if you delay the decision to age 35, just 10 years later.
Of course, your contribution rate is not the only factor to consider in achieving a decent pension. The assets you choose, the charges you pay and the underlying performance you achieve - plus the level of inflation, interest rates and hence annuity rates on the day you retire - are all just as important. Many of these can be planned for - but like anything, the earlier you start to think about it, the easier it will be.
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All of this is great news for us as individuals as it offers the prospect of a longer, healthier and happier life. However, before you start dreaming of such a retirement, with endless games of golf, decades of holidays and extended time with the grandchildren, its worth considering how you are going to pay for it.
These raised expectations for our older age mean that saving for our retirement is perhaps more important than ever – but also, the earlier you start, the easier it is. Indeed, the money you save between the ages of 25 and 35 could account for half the amount you get back when you reach 65 so even if retirement seems no more than a distant dream, doing something proactive could really benefit you long term.
The reason for this is compound interest – that is, the way in which interest you earn on your money begins to earn interest on itself. For example: if you invest £5,000 and leave it for five years at an interest rate of 5% pa then, at the end of 5 years, you will have £6,381. 5% of this initial £5,000 would be £250 a year – a total of £1,250 – but the money actually earns £1,381. This additional £131 is the amount earned by the interest itself. Simply by leaving the interest you earn invested, you can earn even more interest - for no additional outlay whatsoever.
The best thing about compound interest though is, the longer it is left to work, the more impressive the figures become. If you left that £5,000 invested for 10 years, your total return would be £8,144 - £644 of which would be entirely down to the interest earning interest. Turn the calculation around and you find that if you want to achieve a pension fund value of £100,000, assuming an interest rate of 6% pa after charges, it would cost £50 a month from age 25, but doubles to £100 a month if you delay the decision to age 35, just 10 years later.
Of course, your contribution rate is not the only factor to consider in achieving a decent pension. The assets you choose, the charges you pay and the underlying performance you achieve - plus the level of inflation, interest rates and hence annuity rates on the day you retire - are all just as important. Many of these can be planned for - but like anything, the earlier you start to think about it, the easier it will be.
Retirement planning
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The rate of inflation remains a significant problem
policymakers at the Bank of England (BoE), and their headache is unlikely to abate. Their dilemma centres on the need to bring inflation under control without derailing Britain’s fragile economic recovery.
UK Consumer Price Inflation (CPI) remained static at 3.1% year on year during August, according to the Office for National Statistics (ONS), after falling for the previous three months. Month-on-month, inflation rose by 0.5% during August, having fallen by 0.2% during July.
Inflationary pressures have been exacerbated by higher prices for clothing and footwear, food and, in particular, air travel. Air fares experienced a record rise of 16.1%, underpinned by seasonal demand. Meanwhile, food prices registered an increase of 4.1% over the year. The price of wheat has posted a particularly sharp rise in the wake of fierce drought in Russia and devastating floods in Pakistan Elsewhere, retailer Primark recently warned that the clothing industry faces pressure from the rising costs of raw materials and shipping, and from the scheduled rise in VAT in January 2011.
While CPI remained at 3.1% in August, growth in average earnings (excluding bonuses) in the year to August 2010 was 1.5%, indicating that UK wage earners’ ability to spend is not keeping pace with rising prices. Looking ahead, concerns about public sector cuts, higher taxes and unemployment are likely to increase caution amongst consumers, and sentiment was not improved by the news that retail sales posted their first monthly decline since January during August.
UK inflation remains well ahead of the BoE’s government-set target of 2%, and has stayed above target since December 2009, fuelling speculation that the Monetary Policy Committee (MPC) will be forced to increase interest rates rather sooner than expected. Interest rates have remained at their all-time low of 0.5% since March 2009, and an increase in rates would prove controversial amid stringent cuts in public spending and a fragile economic recovery.
In July’s Quarterly Inflation Report, the BoE warned that inflation is likely to remain above target until the end of 2011, underpinned by higher VAT, rising energy costs and the effects of a weak pound. In the short term, BoE policymakers believe that the risks to UK inflation lie on the upside. Looking further ahead, the BoE believes that inflation will eventually subside below 2% during 2012 as spare capacity continues to affect companies’ costs and prices.
www.sterlingfs.co.uk
UK Consumer Price Inflation (CPI) remained static at 3.1% year on year during August, according to the Office for National Statistics (ONS), after falling for the previous three months. Month-on-month, inflation rose by 0.5% during August, having fallen by 0.2% during July.
Inflationary pressures have been exacerbated by higher prices for clothing and footwear, food and, in particular, air travel. Air fares experienced a record rise of 16.1%, underpinned by seasonal demand. Meanwhile, food prices registered an increase of 4.1% over the year. The price of wheat has posted a particularly sharp rise in the wake of fierce drought in Russia and devastating floods in Pakistan Elsewhere, retailer Primark recently warned that the clothing industry faces pressure from the rising costs of raw materials and shipping, and from the scheduled rise in VAT in January 2011.
While CPI remained at 3.1% in August, growth in average earnings (excluding bonuses) in the year to August 2010 was 1.5%, indicating that UK wage earners’ ability to spend is not keeping pace with rising prices. Looking ahead, concerns about public sector cuts, higher taxes and unemployment are likely to increase caution amongst consumers, and sentiment was not improved by the news that retail sales posted their first monthly decline since January during August.
UK inflation remains well ahead of the BoE’s government-set target of 2%, and has stayed above target since December 2009, fuelling speculation that the Monetary Policy Committee (MPC) will be forced to increase interest rates rather sooner than expected. Interest rates have remained at their all-time low of 0.5% since March 2009, and an increase in rates would prove controversial amid stringent cuts in public spending and a fragile economic recovery.
In July’s Quarterly Inflation Report, the BoE warned that inflation is likely to remain above target until the end of 2011, underpinned by higher VAT, rising energy costs and the effects of a weak pound. In the short term, BoE policymakers believe that the risks to UK inflation lie on the upside. Looking further ahead, the BoE believes that inflation will eventually subside below 2% during 2012 as spare capacity continues to affect companies’ costs and prices.
www.sterlingfs.co.uk
Friday, 15 October 2010
Global equities perform strongly
Share prices performed strongly over September as a whole as the MSCI World index rose by 9.1% in US dollar terms over the month, and by 13.2% over the third quarter of 2010. The UK and US both performed strongly although Japan lagged other major markets.
Even so, investors remained uncertain, and this cautious mood was well illustrated by the price of gold, which reached record highs during September as investors sought safe havens for their money. Meanwhile, the Organisation for Economic Co-operation & Development downgraded its forecast for economic expansion in the G7 countries – it now expects growth to reach 1.5% during the second half of 2010, compared with its previous forecast of 2.5%.
US equities posted robust gains during September. Demand for medium-sized and smaller companies was particularly strong, suggesting investors have become somewhat more sanguine about the prospects for the domestic and global economic recovery. Nevertheless, optimism remains tempered by concerns over a feeble housing market and relentlessly high unemployment.
In the UK, gains were also fuelled by a renewed appetite for medium-sized and smaller companies as investors became a little more hopeful about economic prospects. Nevertheless, sentiment remains fragile amid ongoing concerns over Government spending cuts. The Confederation of British Industry believes the UK economy will expand more slowly than expected during 2011 as public spending cuts get underway.
Europe continues to look like a region of two halves. Germany in particular looks increasingly robust, underpinned by rising consumer and business confidence and a declining rate of unemployment. At the other end of the spectrum, however, some countries in the region continue to look distinctly shaky. Ireland stole much of the limelight during the month as the government announced its plan to take majority ownership of Allied Irish Banks. Elsewhere, Greece’s economy contracted by 1.8% during the second quarter.
Share prices in Japan ended the month in positive territory but could not match returns from many other leading markets. Investors remain concerned about the power of the economic recoverywhile, the yen’s sustained strength continues to preoccupy Japan’s exporters. Looking ahead, the quarterly Tankan survey indicated Japanese companies have become increasingly pessimistic.
According to a recent study by the World Economic Forum, Switzerland held its place as the world’s most competitive economy, followed by Sweden and Singapore. The US fell to fourth place, having lost the top spot in 2009, while the UK rose one position to 12th place.
Even so, investors remained uncertain, and this cautious mood was well illustrated by the price of gold, which reached record highs during September as investors sought safe havens for their money. Meanwhile, the Organisation for Economic Co-operation & Development downgraded its forecast for economic expansion in the G7 countries – it now expects growth to reach 1.5% during the second half of 2010, compared with its previous forecast of 2.5%.
US equities posted robust gains during September. Demand for medium-sized and smaller companies was particularly strong, suggesting investors have become somewhat more sanguine about the prospects for the domestic and global economic recovery. Nevertheless, optimism remains tempered by concerns over a feeble housing market and relentlessly high unemployment.
In the UK, gains were also fuelled by a renewed appetite for medium-sized and smaller companies as investors became a little more hopeful about economic prospects. Nevertheless, sentiment remains fragile amid ongoing concerns over Government spending cuts. The Confederation of British Industry believes the UK economy will expand more slowly than expected during 2011 as public spending cuts get underway.
Europe continues to look like a region of two halves. Germany in particular looks increasingly robust, underpinned by rising consumer and business confidence and a declining rate of unemployment. At the other end of the spectrum, however, some countries in the region continue to look distinctly shaky. Ireland stole much of the limelight during the month as the government announced its plan to take majority ownership of Allied Irish Banks. Elsewhere, Greece’s economy contracted by 1.8% during the second quarter.
Share prices in Japan ended the month in positive territory but could not match returns from many other leading markets. Investors remain concerned about the power of the economic recoverywhile, the yen’s sustained strength continues to preoccupy Japan’s exporters. Looking ahead, the quarterly Tankan survey indicated Japanese companies have become increasingly pessimistic.
According to a recent study by the World Economic Forum, Switzerland held its place as the world’s most competitive economy, followed by Sweden and Singapore. The US fell to fourth place, having lost the top spot in 2009, while the UK rose one position to 12th place.
Thursday, 14 October 2010
Emerging market funds see an influx of new money
According to figures released by the Investment Management Association during September, investors’ appetite for Global Emerging Markets funds was particularly strong in August, outstripping demand for funds in all other major geographical regions.
Share prices in emerging markets rose over September as investors became more optimistic about the sustainability of the global recovery and, in particular, the US economy. Of the leading emerging markets, Brazil and India performed particularly well in US dollar terms.
Amid signs China’s economy is stabilising, the People’s Bank of China believes the country’s economic growth will be “relatively fast”. During the month, the central bank confirmed it intends to continue a “moderately easy” monetary policy, but admitted it needs to balance the need to maintain “steady and rapid” economic development with restructuring the country’s economy and managing expectations for inflation.
China’s currency remains contentious, with US Treasury Secretary Timothy Geithner saying the US will use all necessary resources to persuade China to allow its currency to appreciate. “The pace of appreciation has been too slow and the extent of appreciation too limited,” he added. However, during a visit to the US, China’s premier Wen Jiabao warned that “the problems faced by China-US economic and trade relations are structural contradictions that can only be solved step by step.”
Consumer prices in China registered their fastest growth in 22 months during August, rising by 3.5% year on year. For their part, retail sales rose by 18.4% year on year during August. China’s central bank believes that domestic consumption has to rise if China is to thrive in an increasingly demanding global arena.
In India, the central bank increased interest rates from 5.75% to 6% during the month as the country continues to combat considerable inflationary pressures. Meanwhile, Russia maintained interest rates at 7.75% for another month. Russia’s central bank believes the country’s inflationary risks remain relatively mild and consumer price growth is moderate, although policymakers also cautioned against the possibility of growing inflationary pressures towards the end of 2010 and beginning of 2011.
Drought remains a problem in Russia – and indeed is also proving a headache for Brazil. Brazil is the world’s leading producer of commodities such as coffee and orange juice, and is also a major exporter of ethanol, soya, sugar and beef. It is feared that severe drought will affect production and curb export activity, which would in turn push up prices elsewhere in the world.
http://www.sterlingfs.co.uk
Share prices in emerging markets rose over September as investors became more optimistic about the sustainability of the global recovery and, in particular, the US economy. Of the leading emerging markets, Brazil and India performed particularly well in US dollar terms.
Amid signs China’s economy is stabilising, the People’s Bank of China believes the country’s economic growth will be “relatively fast”. During the month, the central bank confirmed it intends to continue a “moderately easy” monetary policy, but admitted it needs to balance the need to maintain “steady and rapid” economic development with restructuring the country’s economy and managing expectations for inflation.
China’s currency remains contentious, with US Treasury Secretary Timothy Geithner saying the US will use all necessary resources to persuade China to allow its currency to appreciate. “The pace of appreciation has been too slow and the extent of appreciation too limited,” he added. However, during a visit to the US, China’s premier Wen Jiabao warned that “the problems faced by China-US economic and trade relations are structural contradictions that can only be solved step by step.”
Consumer prices in China registered their fastest growth in 22 months during August, rising by 3.5% year on year. For their part, retail sales rose by 18.4% year on year during August. China’s central bank believes that domestic consumption has to rise if China is to thrive in an increasingly demanding global arena.
In India, the central bank increased interest rates from 5.75% to 6% during the month as the country continues to combat considerable inflationary pressures. Meanwhile, Russia maintained interest rates at 7.75% for another month. Russia’s central bank believes the country’s inflationary risks remain relatively mild and consumer price growth is moderate, although policymakers also cautioned against the possibility of growing inflationary pressures towards the end of 2010 and beginning of 2011.
Drought remains a problem in Russia – and indeed is also proving a headache for Brazil. Brazil is the world’s leading producer of commodities such as coffee and orange juice, and is also a major exporter of ethanol, soya, sugar and beef. It is feared that severe drought will affect production and curb export activity, which would in turn push up prices elsewhere in the world.
http://www.sterlingfs.co.uk
Tuesday, 12 October 2010
Strong yen hurts Japan
Share prices in Japan ended September on a positive note and the Nikkei 225 index rose by 6.2% over the month as a whole. Even so, the index ended the third quarter in negative territory, falling by 0.1%. Investors remain concerned about the power of the global economic recovery and, according to figures released during September by the Investment Management Association, Japan was one of the worst-selling fund sectors during August, surpassed only by North America.
Investor sentiment towards Japan remains constrained by ongoing concerns that the debt crisis affecting some European countries will hinder the global economic recovery and hence demand for Japanese exports. The country’s exporters are also preoccupied by the sustained strength of the yen, as a strong yen increases the cost of Japanese goods for overseas buyers.
Machinery orders increased during July, rising by 5.7% month on month, but industrial production registered an unexpected decline during August, stoking fears Japan’s export-led recovery has run out of steam.
Some of Japan’s leading companies – for example, Panasonic – are shifting part of their production abroad, which will reduce exposure to currency risk. Japan’s Finance Ministry sold yen for the first time in six years during September as the currency’s persistent strength continued to throw economic recovery off course, and this intervention provided a welcome boost for beleaguered exporters.
Looking ahead, the quarterly Tankan business confidence survey indicated that, although readings for the third quarter showed signs of improvement, Japanese companies have grown increasingly pessimistic as they move into the fourth quarter of 2010. Pessimists are expected to outnumber optimists by the end of the year. The results of the Tankan boosted speculation the Bank of Japan (BoJ) might decide to expand its credit programme.
During September, games manufacturer Nintendo downgraded its profit forecasts and cut its full-year dividend. The company warned that its new handheld gaming device will not be released in time for the important holiday season, amid concerns over the strength of the yen and problems surrounding production.
Companies’ sales increased by 20.3% during the second quarter, and retail sales rose by 4.3% in August, although the rise was somewhat smaller than hoped. Meanwhile, consumer confidence in Japan remains low and there are fears an increase in risk aversion could hamper a recovery in internal demand. According to the BoJ, Japanese households have become more defensive, having increased their cash holdings amid unrelenting doubt about the outlook for the economy.
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Investor sentiment towards Japan remains constrained by ongoing concerns that the debt crisis affecting some European countries will hinder the global economic recovery and hence demand for Japanese exports. The country’s exporters are also preoccupied by the sustained strength of the yen, as a strong yen increases the cost of Japanese goods for overseas buyers.
Machinery orders increased during July, rising by 5.7% month on month, but industrial production registered an unexpected decline during August, stoking fears Japan’s export-led recovery has run out of steam.
Some of Japan’s leading companies – for example, Panasonic – are shifting part of their production abroad, which will reduce exposure to currency risk. Japan’s Finance Ministry sold yen for the first time in six years during September as the currency’s persistent strength continued to throw economic recovery off course, and this intervention provided a welcome boost for beleaguered exporters.
Looking ahead, the quarterly Tankan business confidence survey indicated that, although readings for the third quarter showed signs of improvement, Japanese companies have grown increasingly pessimistic as they move into the fourth quarter of 2010. Pessimists are expected to outnumber optimists by the end of the year. The results of the Tankan boosted speculation the Bank of Japan (BoJ) might decide to expand its credit programme.
During September, games manufacturer Nintendo downgraded its profit forecasts and cut its full-year dividend. The company warned that its new handheld gaming device will not be released in time for the important holiday season, amid concerns over the strength of the yen and problems surrounding production.
Companies’ sales increased by 20.3% during the second quarter, and retail sales rose by 4.3% in August, although the rise was somewhat smaller than hoped. Meanwhile, consumer confidence in Japan remains low and there are fears an increase in risk aversion could hamper a recovery in internal demand. According to the BoJ, Japanese households have become more defensive, having increased their cash holdings amid unrelenting doubt about the outlook for the economy.
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High demand for bond funds
Investor sentiment recovered over the third quarter of 2010, leading to a renewed appetite for risk, and so many equity markets demonstrated improved performance during September. Nevertheless, bonds and bond funds remained in demand.
According to figures released by the Investment Management Association (IMA) during September, sales of bond funds reached peaks previously enjoyed during the first half of 2009 and exceeded £1bn of sales for the first time since May 2009. Sterling Corporate Bond proved the best-selling IMA sector during August, experiencing its biggest-selling month since May 2009. In total, three of the top-five IMA sectors were bond-related – Global Bonds and Sterling Strategic Bond, joining Sterling Corporate Bond.
According to the Office for National Statistics (ONS), UK inflation increased by 3.1% year on year during August. At its September meeting, the Bank of England’s (BoE) Monetary Policy Committee indicated it might be prepared to support economic growth by adding further stimulus if necessary.
When UK interest rates finally start to rise, there is a risk corporate bonds might start to lose their gloss. Even so, it is worth noting strategic bond funds possess greater scope to invest in higher-yield bonds than funds that are obliged to focus only on investment-grade bonds.
The ONS confirmed the UK economy expanded by 1.2% during the second quarter, boosted by strengthening consumer spending and inventory growth, but also revised first-quarter growth up from 0.3% to 0.4%.
Meanwhile, the International Monetary Fund (IMF) has said it believes the UK economy is “on the mend” and supports the coalition Government’s planned cuts in public spending. That said, the IMF believes the BoE should be ready to reinstate its programme of asset purchases if the economic recovery shows signs of flagging.
The UK’s substantial budget deficit continued to put pressure on the coalition. However, investors were heartened by the news that ratings agency Moody’s Investors Service expects the UK to meet the challenges of a substantial budget deficit and a tough economic outlook. Moody’s reaffirmed the UK’s Aaa credit rating during September, citing the Government’s “commitment to stabilise and eventually reverse the deterioration in financial strength”.
The IMF expects the UK economy to recover at a moderate rate, predicting growth of 2% in 2011 – slightly lower than its previous forecast of 2.1%. For its part, the Confederation of British Industry also tempered its expectations for economic growth in the UK during 2011, down from 2.5% to 2%.
www.sterlingfs.co.uk
According to figures released by the Investment Management Association (IMA) during September, sales of bond funds reached peaks previously enjoyed during the first half of 2009 and exceeded £1bn of sales for the first time since May 2009. Sterling Corporate Bond proved the best-selling IMA sector during August, experiencing its biggest-selling month since May 2009. In total, three of the top-five IMA sectors were bond-related – Global Bonds and Sterling Strategic Bond, joining Sterling Corporate Bond.
According to the Office for National Statistics (ONS), UK inflation increased by 3.1% year on year during August. At its September meeting, the Bank of England’s (BoE) Monetary Policy Committee indicated it might be prepared to support economic growth by adding further stimulus if necessary.
When UK interest rates finally start to rise, there is a risk corporate bonds might start to lose their gloss. Even so, it is worth noting strategic bond funds possess greater scope to invest in higher-yield bonds than funds that are obliged to focus only on investment-grade bonds.
The ONS confirmed the UK economy expanded by 1.2% during the second quarter, boosted by strengthening consumer spending and inventory growth, but also revised first-quarter growth up from 0.3% to 0.4%.
Meanwhile, the International Monetary Fund (IMF) has said it believes the UK economy is “on the mend” and supports the coalition Government’s planned cuts in public spending. That said, the IMF believes the BoE should be ready to reinstate its programme of asset purchases if the economic recovery shows signs of flagging.
The UK’s substantial budget deficit continued to put pressure on the coalition. However, investors were heartened by the news that ratings agency Moody’s Investors Service expects the UK to meet the challenges of a substantial budget deficit and a tough economic outlook. Moody’s reaffirmed the UK’s Aaa credit rating during September, citing the Government’s “commitment to stabilise and eventually reverse the deterioration in financial strength”.
The IMF expects the UK economy to recover at a moderate rate, predicting growth of 2% in 2011 – slightly lower than its previous forecast of 2.1%. For its part, the Confederation of British Industry also tempered its expectations for economic growth in the UK during 2011, down from 2.5% to 2%.
www.sterlingfs.co.uk
Investor remain hopefully on the UK economy
In the UK, gains were fuelled by a renewed appetite for medium-sized and smaller companies during September as investors became a little more hopeful about economic prospects. The FTSE 100 index rose by 6.2% during the month and by 12.8% during the third quarter of 2010.
Despite worries over the possible effects of government spending cuts, share prices were boosted by a rise in corporate activity and growing optimism about the strength and sustainability of the global economic recovery.
UK retail sales dropped unexpectedly during August, registering their first fall since January, according to the Office for National Statistics. Sales at UK food retailers fell by 0.5% during August compared with July, while sales at “other stores” fell by a sizeable 2.1%. On a brighter note, sales at mail order and Internet retailers rose by 2.1% and department stores also posted gains.
John Lewis announced a 28% rise in pre-tax profits for the six months to 31 July, boosted by robust growth in its Waitrose and online divisions. Nevertheless, the company warned that the retail sector faces the “economic headwinds” of public spending cuts and higher taxes. Meanwhile, department-store operator Debenhams expressed caution about the level of consumer confidence.
High-street clothing retailer Next announced a 15% rise in first-half profits, while Laura Ashley expressed caution, warning the outlook remains “uncertain”. Sports retailer JJB Sports announced it had increased promotional activity after experiencing “more volatile” sales. Meanwhile, DIY retailer Kingfisher announced strong growth in profits that were underpinned by successful cost-cutting measures.
After posting a rise during August, UK consumer confidence fell more heavily than expected during September, according to market researcher GfK NOP, and the public became more concerned about the prospects for their own personal financial situation and for the wider economy.
The British Retail Consortium warned the Government of “potential collateral damage to the private sector” ahead of sweeping public spending cuts, but also highlighted that retailers are employing “thousands more people than a year ago”. The Confederation of British Industry believes the UK economy will expand more slowly than expected during 2011, as budget cuts get under way.
According to statistics released by the Investment Management Association during the month, funds under management reached their highest level on record during August. Equities proved to be the second highest-selling asset class, and the UK All Companies and UK Smaller Companies sectors experienced positive net retail sales during the month.
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Despite worries over the possible effects of government spending cuts, share prices were boosted by a rise in corporate activity and growing optimism about the strength and sustainability of the global economic recovery.
UK retail sales dropped unexpectedly during August, registering their first fall since January, according to the Office for National Statistics. Sales at UK food retailers fell by 0.5% during August compared with July, while sales at “other stores” fell by a sizeable 2.1%. On a brighter note, sales at mail order and Internet retailers rose by 2.1% and department stores also posted gains.
John Lewis announced a 28% rise in pre-tax profits for the six months to 31 July, boosted by robust growth in its Waitrose and online divisions. Nevertheless, the company warned that the retail sector faces the “economic headwinds” of public spending cuts and higher taxes. Meanwhile, department-store operator Debenhams expressed caution about the level of consumer confidence.
High-street clothing retailer Next announced a 15% rise in first-half profits, while Laura Ashley expressed caution, warning the outlook remains “uncertain”. Sports retailer JJB Sports announced it had increased promotional activity after experiencing “more volatile” sales. Meanwhile, DIY retailer Kingfisher announced strong growth in profits that were underpinned by successful cost-cutting measures.
After posting a rise during August, UK consumer confidence fell more heavily than expected during September, according to market researcher GfK NOP, and the public became more concerned about the prospects for their own personal financial situation and for the wider economy.
The British Retail Consortium warned the Government of “potential collateral damage to the private sector” ahead of sweeping public spending cuts, but also highlighted that retailers are employing “thousands more people than a year ago”. The Confederation of British Industry believes the UK economy will expand more slowly than expected during 2011, as budget cuts get under way.
According to statistics released by the Investment Management Association during the month, funds under management reached their highest level on record during August. Equities proved to be the second highest-selling asset class, and the UK All Companies and UK Smaller Companies sectors experienced positive net retail sales during the month.
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www.sterlingfs.co.uk
Monday, 11 October 2010
US technology shares surge
US equities performed strongly during September. Medium-sized and smaller companies performed better than larger companies, suggesting investors have grown somewhat more sanguine about the prospects for the domestic and global economic recovery.
During the second quarter of 2010, US corporate profits rose by 3% quarter on quarter, and by 37% year on year.The Dow Jones Industrial Average index rose by 7.7% during the month and by more than 10% over the third quarter of 2010. Meanwhile, the technology-heavy Nasdaq index surged by more than 12% during September, suggesting investors’ appetite for technology and growth-related stocks has increased. During the month, software manufacturer Oracle reported better-than-expected profits and sales for its first quarter.
The Conference Board’s index of US leading indicators rose more strongly than expected during August, boosting hopes economic expansion will continue to gather pace. The US economy expanded by 1.7% year on year during the second quarter, which was better than the growth of 1.6% that had previously been estimated.
Even so, a combination of relatively anaemic economic growth and low inflation has prompted the US Federal Reserve to reassure investors it continues to keep a close eye on economic and financial developments, and “is prepared to provide additional accommodation if needed”. This news boosted hopes the US central bank will not allow the country to slide back into recession.
Export activity showed signs of recovery as the US trade deficit narrowed by more than expected during July and US exports rose to reach their highest level since August 2008. This news boosted hopes overseas demand for American products is picking up.
US consumer spending rose at its fastest pace since the first quarter of 2007 – however, the rate of unemployment remains stubbornly high at 9.6%, and this is likely to put a brake on consumers’ ability to spend.
The Fed warned that spending is likely to remain constrained by unemployment, tight credit conditions and a depressed housing market. According to the Federal Housing Finance Agency, US house prices fell by an annualised 3.3% during July – the drop bing attributed to an increase in supply resulting from a rise in the number of repossessed properties.
Household net worth declined during the second quarter of 2010, weakened by a fall in share prices. Meanwhile consumer confidence unexpectedly fell during September to reach a one-year low. The decline was attributed to a drop in confidence among upper-income households.
To go to our main site please follow this link www.sterlingfs.co.uk
During the second quarter of 2010, US corporate profits rose by 3% quarter on quarter, and by 37% year on year.The Dow Jones Industrial Average index rose by 7.7% during the month and by more than 10% over the third quarter of 2010. Meanwhile, the technology-heavy Nasdaq index surged by more than 12% during September, suggesting investors’ appetite for technology and growth-related stocks has increased. During the month, software manufacturer Oracle reported better-than-expected profits and sales for its first quarter.
The Conference Board’s index of US leading indicators rose more strongly than expected during August, boosting hopes economic expansion will continue to gather pace. The US economy expanded by 1.7% year on year during the second quarter, which was better than the growth of 1.6% that had previously been estimated.
Even so, a combination of relatively anaemic economic growth and low inflation has prompted the US Federal Reserve to reassure investors it continues to keep a close eye on economic and financial developments, and “is prepared to provide additional accommodation if needed”. This news boosted hopes the US central bank will not allow the country to slide back into recession.
Export activity showed signs of recovery as the US trade deficit narrowed by more than expected during July and US exports rose to reach their highest level since August 2008. This news boosted hopes overseas demand for American products is picking up.
US consumer spending rose at its fastest pace since the first quarter of 2007 – however, the rate of unemployment remains stubbornly high at 9.6%, and this is likely to put a brake on consumers’ ability to spend.
The Fed warned that spending is likely to remain constrained by unemployment, tight credit conditions and a depressed housing market. According to the Federal Housing Finance Agency, US house prices fell by an annualised 3.3% during July – the drop bing attributed to an increase in supply resulting from a rise in the number of repossessed properties.
Household net worth declined during the second quarter of 2010, weakened by a fall in share prices. Meanwhile consumer confidence unexpectedly fell during September to reach a one-year low. The decline was attributed to a drop in confidence among upper-income households.
To go to our main site please follow this link www.sterlingfs.co.uk
European stocks perform strongly during September
The MSCI Europe ex-UK index rose 4.8% over the month and by 6.6% during the third quarter of 2010.
Across the Continent as a whole, medium-sized and smaller companies performed particularly well, suggesting investors became somewhat less averse to risk during the month amid increased optimism the global economic recovery is stabilising.According to data released by the Investment Management Association during the month, demand for funds in the European Smaller Companies sector proved slightly more popular during August than the mainstream Europe excluding UK sector.
Nevertheless, the positions of some individual countries within Europe continue to appear less than solid, and Europe continues to look like a region of two halves. At one end of the spectrum, Ireland and Greece performed particularly poorly during September while, at the other, countries within the Nordic region made strong gains. France and Germany also posted strong performances – the former’s CAC 40 index rose 6.4% during the month, while the DAX index rose 5.1%.
Germany in particular appears increasingly robust. Consumer confidence rose to its highest level in almost three years during September, while business confidence reached levels not seen for more than three years, boosting confidence in the resilience of Germany’s companies. Unemployment did fall by more than expected during September in Germany but remained stable at 10.1% in the eurozone as a whole.
In sharp contrast, some countries within the region continue to appear far from stable. Greece’s economy contracted by 1.8% during the second quarter, and Moody’s Investors Service reduced Spain’s credit rating from AA1 to Aaa, highlighting the country’s weak economic position.
In Ireland, the banking sector continued to absorb headlines, and the country’s government announced plans to take majority ownership of the troubled Allied Irish Banks. Meanwhile, Ireland’s finance ministry announced Anglo Irish Bank – described as “our country’s most distressed institution – is to be divided into a “Funding Bank” and an “Asset Recovery Bank”. The latter will subsequently be sold in its entirety, or its assets run off over a period of time. The International Monetary Fund has said the measures announced by the Irish government are “appropriate and the right thing to do”.
Elsewhere, consumer spending fell in France during August as consumers reined in their expenditure amid expectations of budget cuts and plans to raise the country’s retirement age. Consumer spending declined by 1.6% during August, having risen by 2.7% during July.
To go to our main site please follow this link www.sterlingfs.co.uk
Across the Continent as a whole, medium-sized and smaller companies performed particularly well, suggesting investors became somewhat less averse to risk during the month amid increased optimism the global economic recovery is stabilising.According to data released by the Investment Management Association during the month, demand for funds in the European Smaller Companies sector proved slightly more popular during August than the mainstream Europe excluding UK sector.
Nevertheless, the positions of some individual countries within Europe continue to appear less than solid, and Europe continues to look like a region of two halves. At one end of the spectrum, Ireland and Greece performed particularly poorly during September while, at the other, countries within the Nordic region made strong gains. France and Germany also posted strong performances – the former’s CAC 40 index rose 6.4% during the month, while the DAX index rose 5.1%.
Germany in particular appears increasingly robust. Consumer confidence rose to its highest level in almost three years during September, while business confidence reached levels not seen for more than three years, boosting confidence in the resilience of Germany’s companies. Unemployment did fall by more than expected during September in Germany but remained stable at 10.1% in the eurozone as a whole.
In sharp contrast, some countries within the region continue to appear far from stable. Greece’s economy contracted by 1.8% during the second quarter, and Moody’s Investors Service reduced Spain’s credit rating from AA1 to Aaa, highlighting the country’s weak economic position.
In Ireland, the banking sector continued to absorb headlines, and the country’s government announced plans to take majority ownership of the troubled Allied Irish Banks. Meanwhile, Ireland’s finance ministry announced Anglo Irish Bank – described as “our country’s most distressed institution – is to be divided into a “Funding Bank” and an “Asset Recovery Bank”. The latter will subsequently be sold in its entirety, or its assets run off over a period of time. The International Monetary Fund has said the measures announced by the Irish government are “appropriate and the right thing to do”.
Elsewhere, consumer spending fell in France during August as consumers reined in their expenditure amid expectations of budget cuts and plans to raise the country’s retirement age. Consumer spending declined by 1.6% during August, having risen by 2.7% during July.
To go to our main site please follow this link www.sterlingfs.co.uk
Monday, 4 October 2010
Absolute Return
The Investment Management Association only launched a dedicated grouping for absolute return funds in April 2008 and yet, by its second anniversary, the sector had attracted more than £11bn. However, the huge popularity of absolute return investing among UK retail investors does raise the question of how they and their advisers should go about assessing the performance and risk profile of these funds.
As with more ‘traditional’ long-only funds, the headline performance numbers do not tell the whole story and so it is vital to understand what is driving the underlying returns and how much risk is being taken to achieve them. Keeping an eye on these measures and how they change over time should offer a better insight into the nature of an absolute return fund and, importantly, how it is managed.
While some of these metrics are the same as the ones investors would use with long-only funds – for example, volatility and Sharpe ratios – others are very different. Indeed, one of the more common mistakes made by investors and their advisers is to compare the performance of absolute return funds to the equity markets.
Absolute return funds should not be seen as a way of replacing equity exposure within a portfolio but as a way of enhancing that portfolio’s overall risk/return characteristics. As such, absolute return funds should have a low correlation to equity markets, low volatility relative to equity markets and a low beta.
The Sharpe ratio is a particularly useful measure for absolute return funds because it reflects volatility and is compared to the risk-free rate. On the other hand, the information ratio, which is often used with long-only funds, is not helpful in the absolute return space because of its link with equity markets. Investors and their advisers should instead focus on a fund’s correlation with markets – over time, a correlation with equity returns that is close to zero would be indicative of a true absolute return strategy.
Gross exposure
The gross exposure of an absolute return portfolio can reveal the degree of risk that is being taken as it shows how much leverage is being used. It is important investors understand why this varies and they should be looking out for changes over time as well as gauging a particular manager’s approach to gross exposure.
At times of higher volatility, an absolute return fund manager can meet their return target with a lower gross exposure. Leaving it higher might mean the fund achieves greater returns but it could also mean the manager is taking more risk than is necessary to achieve the return target.
Another useful metric is net exposure, which shows how exposed a fund is to market movements, and changes over a period of time will once again tell more of a story than the level at any particular moment. Some fund managers will keep their net exposure within a tight band – for example, market-neutral funds would stay close to zero, with a view to only delivering stock-specific risk and returns without any market exposure. Other funds, meanwhile, may have the flexibility to move within a particular range, depending on their managers’ views.
A fund with a bottom-up investment process would typically have a net exposure that reflects the number of long positions held against the number of short ones. However, there could also be times where a fund’s net exposure level is significantly out of line with the manager’s market outlook and, here, they might use index futures to shift the net exposure up or down to reflect their degree of confidence in the direction of the market. Of course, the manager could simply increase individual stock positions but this brings its own risks. Not only do index futures allow the market exposure to be altered without excessive stock-specific risk, they are also very liquid.
Source of return
A final question for investors and their advisers to address is whether a fund is really generating absolute returns – and this is especially the case after equity markets have rallied. High net exposure may mean returns have actually come from beta or exposure to market risk, which is not what investors should expect from an absolute return fund. As an example –and all things being equal – if markets have rallied by 20%, a fund with net exposure of 100% that returns 15% is less impressive than a fund with net exposure of zero that returns 10%.
The real test of an absolute return manager is whether they do generate absolute returns across different market conditions. Therefore, while investors should not expect positive returns every month, it is important to assess whether a fund can deliver positive returns over time in different environments. An absolute return fund that is essentially tracking equity markets, for example, is not delivering the benefits it ought to as an effective diversifier to an investor’s overall portfolio.
The right absolute return strategies can benefit investors when used in portfolio construction but these funds should not be seen as a substitute for other asset classes. Equally, the investments selected should actually deliver absolute returns rather than mimicking another asset class. In the end – and as with long-only investments – the performance of absolute return funds must be assessed relative to the risks taken and using measures that are suitable for their unique nature.
As with more ‘traditional’ long-only funds, the headline performance numbers do not tell the whole story and so it is vital to understand what is driving the underlying returns and how much risk is being taken to achieve them. Keeping an eye on these measures and how they change over time should offer a better insight into the nature of an absolute return fund and, importantly, how it is managed.
While some of these metrics are the same as the ones investors would use with long-only funds – for example, volatility and Sharpe ratios – others are very different. Indeed, one of the more common mistakes made by investors and their advisers is to compare the performance of absolute return funds to the equity markets.
Absolute return funds should not be seen as a way of replacing equity exposure within a portfolio but as a way of enhancing that portfolio’s overall risk/return characteristics. As such, absolute return funds should have a low correlation to equity markets, low volatility relative to equity markets and a low beta.
The Sharpe ratio is a particularly useful measure for absolute return funds because it reflects volatility and is compared to the risk-free rate. On the other hand, the information ratio, which is often used with long-only funds, is not helpful in the absolute return space because of its link with equity markets. Investors and their advisers should instead focus on a fund’s correlation with markets – over time, a correlation with equity returns that is close to zero would be indicative of a true absolute return strategy.
Gross exposure
The gross exposure of an absolute return portfolio can reveal the degree of risk that is being taken as it shows how much leverage is being used. It is important investors understand why this varies and they should be looking out for changes over time as well as gauging a particular manager’s approach to gross exposure.
At times of higher volatility, an absolute return fund manager can meet their return target with a lower gross exposure. Leaving it higher might mean the fund achieves greater returns but it could also mean the manager is taking more risk than is necessary to achieve the return target.
Another useful metric is net exposure, which shows how exposed a fund is to market movements, and changes over a period of time will once again tell more of a story than the level at any particular moment. Some fund managers will keep their net exposure within a tight band – for example, market-neutral funds would stay close to zero, with a view to only delivering stock-specific risk and returns without any market exposure. Other funds, meanwhile, may have the flexibility to move within a particular range, depending on their managers’ views.
A fund with a bottom-up investment process would typically have a net exposure that reflects the number of long positions held against the number of short ones. However, there could also be times where a fund’s net exposure level is significantly out of line with the manager’s market outlook and, here, they might use index futures to shift the net exposure up or down to reflect their degree of confidence in the direction of the market. Of course, the manager could simply increase individual stock positions but this brings its own risks. Not only do index futures allow the market exposure to be altered without excessive stock-specific risk, they are also very liquid.
Source of return
A final question for investors and their advisers to address is whether a fund is really generating absolute returns – and this is especially the case after equity markets have rallied. High net exposure may mean returns have actually come from beta or exposure to market risk, which is not what investors should expect from an absolute return fund. As an example –and all things being equal – if markets have rallied by 20%, a fund with net exposure of 100% that returns 15% is less impressive than a fund with net exposure of zero that returns 10%.
The real test of an absolute return manager is whether they do generate absolute returns across different market conditions. Therefore, while investors should not expect positive returns every month, it is important to assess whether a fund can deliver positive returns over time in different environments. An absolute return fund that is essentially tracking equity markets, for example, is not delivering the benefits it ought to as an effective diversifier to an investor’s overall portfolio.
The right absolute return strategies can benefit investors when used in portfolio construction but these funds should not be seen as a substitute for other asset classes. Equally, the investments selected should actually deliver absolute returns rather than mimicking another asset class. In the end – and as with long-only investments – the performance of absolute return funds must be assessed relative to the risks taken and using measures that are suitable for their unique nature.
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