The independent Office for Budget Responsibility (OBR) updated its forecasts for UK economic growth at the end of November. Although the economy is expected to continue its expansion, the OBR expects the recovery to be a “slower pace than in the recoveries of the 1970s, 1980s and 1990s”.
It also expects the economy to grow by 1.8% this year and 2.1% next year, warning that government spending cuts are likely to make growth “sluggish” over the medium term. In comparison, the Organisation for Economic Cooperation & Development expects the UK economy to expand by 1.8% this year and by 1.7% in 2011. The economy expanded by 0.8% during the third quarter of 2010.
Minutes from the Monetary Policy Committee’s November meeting showed continuing divisions between policymakers, with one calling for an increase in interest rates while another voted for further quantitative easing. Inflation remained well above the Bank of England’s 2% target, reaching 3.2% during October. According to a recent Inflation Report, the Bank believes inflation will remain high during 2011, but expects it to move below 2% by 2013.
The rate of unemployment remained high, falling only slightly over the third quarter to reach 7.7%. The OBR expects unemployment to peak at just over 8% of the labour force during 2011. Retail sales increased during October, month on month – up 0.5% and boosted by activity at non-food stores – although they still fell 0.1% year on year. Sales are likely to rise before 2010 ends, as shoppers seek to beat January’s rise in VAT. According to the Nationwide Building Society, consumer confidence plumbed its lowest depths since March 2009 during October, and consumers appear increasingly pessimistic about prospects for their household income.
Demand for bond funds remained strong among UK investors during October, according to recent data released by the Investment Management Association (IMA). Bonds retained the top spot as the most popular asset class for a fourth month, although Global Bonds was knocked off its position as the best-selling IMA sector by Global Emerging Markets, ranking instead as the third most popular sector during October.
Nevertheless, all IMA bond sectors were in favour during the month – Global Bonds, Steling Strategic Bond and Sterling Corporate Bond led the field while the Gilt and High Yield sectors also experienced net inflows. That said, the attractions of pan-European corporate bonds are likely to have been adversely affected by concerns over the ongoing debt crisis in Europe.
Wednesday, 15 December 2010
Investors more confident about US recovery
Although share prices in general dropped around the world during November, US stockmarkets fell less heavily than many European ones. The Dow Jones Industrial Average index declined 1% over the month while the S&P 500 index fell 0.2%.
Medium-sized and smaller companies performed better than larger companies during November, as investors became more sanguine about prospects for the US economic recovery. Meanwhile car manufacturer GM, which filed for bankruptcy last year, returned to the stockmarket via an IPO that raised more than $20bn (£12.6bn).
According to recent figures released by the Investment Management Association, North American equity funds experienced net outflows during October amid some uncertainty about the speed and stability of the economic recovery.
Nevertheless, US chief executive officers appear to have become increasingly confident about the outlook for economic conditions and prospects for sales growth and corporate spending, and the Young Presidents’ Organization index of sentiment rose in October. Meanwhile, the Organisation for Economic Cooperation & Development (OECD) expects the US economy to expand by 2.7% in 2010, 2.2% in 2011 and 3.1% in 2012.
In rising 0.6% year on year during October, US inflation registered its smallest annual increase since records started in 1957. The US Federal Reserve announced plans to expand its asset purchasing programme by $600bn, having found that progress towards its key objectives has been “disappointingly slow”. The news received a mixed reception and was not welcomed by leaders in some countries, who fear the measures will devalue the US dollar and cause excess capital to flood into their economies, providing unwelcome fuel for inflation.
The US dollar was boosted by signs economic recovery in the US is gathering momentum. Retail sales rose more strongly than expected during October, increasing by 1.2% on the month and by 7.3% year on year. Total sales were boosted by strong growth in vehicle sales, and the news cheered investors looking for evidence the economy is continuing to recover.
The National Retail Federation expects sales during November and December to increase by 2.3% year on year, their strongest annual increase since 2006. Meanwhile, consumer confidence rose to its highest level for five months during November, boosting hopes the economic recovery will remain intact. Meanwhile the US trade deficit contracted more quickly than expected during September, boosted by strong growth in exports and a weak dollar that makes US products cheaper for overseas buyers.
Medium-sized and smaller companies performed better than larger companies during November, as investors became more sanguine about prospects for the US economic recovery. Meanwhile car manufacturer GM, which filed for bankruptcy last year, returned to the stockmarket via an IPO that raised more than $20bn (£12.6bn).
According to recent figures released by the Investment Management Association, North American equity funds experienced net outflows during October amid some uncertainty about the speed and stability of the economic recovery.
Nevertheless, US chief executive officers appear to have become increasingly confident about the outlook for economic conditions and prospects for sales growth and corporate spending, and the Young Presidents’ Organization index of sentiment rose in October. Meanwhile, the Organisation for Economic Cooperation & Development (OECD) expects the US economy to expand by 2.7% in 2010, 2.2% in 2011 and 3.1% in 2012.
In rising 0.6% year on year during October, US inflation registered its smallest annual increase since records started in 1957. The US Federal Reserve announced plans to expand its asset purchasing programme by $600bn, having found that progress towards its key objectives has been “disappointingly slow”. The news received a mixed reception and was not welcomed by leaders in some countries, who fear the measures will devalue the US dollar and cause excess capital to flood into their economies, providing unwelcome fuel for inflation.
The US dollar was boosted by signs economic recovery in the US is gathering momentum. Retail sales rose more strongly than expected during October, increasing by 1.2% on the month and by 7.3% year on year. Total sales were boosted by strong growth in vehicle sales, and the news cheered investors looking for evidence the economy is continuing to recover.
The National Retail Federation expects sales during November and December to increase by 2.3% year on year, their strongest annual increase since 2006. Meanwhile, consumer confidence rose to its highest level for five months during November, boosting hopes the economic recovery will remain intact. Meanwhile the US trade deficit contracted more quickly than expected during September, boosted by strong growth in exports and a weak dollar that makes US products cheaper for overseas buyers.
Brazil and India perform badly during November
The major ‘Bric’ markets of Brazil, Russia, India and China fell by 3.6% in US dollar terms, pulled lower by India and Brazil.
After generating relatively strong returns during October, share prices in emerging markets fell back during November. The MSCI Emerging Markets index declined by 2.7% in US dollar terms during the month, and underlying markets showed a mixed performance.
The Organisation for Economic Cooperation & Development (OECD) reduced its forecast for global growth during 2011 from 4.5% to 4.2%, but believes growth in many emerging economies will remain relatively strong.
The OECD expects China’s economy to expand by 10.5% during 2010 and by 9.7% in 2011, while India is forecast to grow by 9.1% this year and 8.2% next year. Russia is expected to generate economic growth of 3.7% in 2010, accelerating to 4.2% in 2011. Meanwhile, Brazil’s economy is tipped to expand by 7.5% in 2010, and then to slow to 4.3% in 2011. The latter’s Bovespa index fell during November, dropping more than 4%.
News the US Federal Reserve had decided to expand its asset purchasing programme by $600bn (£380bn) was not universally well received by leaders and policymakers in developing countries, who fear the measures are likely to fuel ongoing inflationary pressures.
Meanwhile, friction over exchange rates continued between the US and China. During the month, the OECD urged China to allow its currency to appreciate, commenting: “The stability of the domestic economy would be enhanced if the exchange-rate policy were more oriented to allowing appreciation.”
In China, the rate of inflation surged during October to 4.4%, compared with a rise of 3.6% during September. In order to combat inflation, China twice increased the amount of funds that lenders must hold in reserve during the month. The Shanghai Composite Index fell by 5.3% during November.
India’s economy expanded by an annualised 8.9% between July and September and policymakers increased the country’s interest rates by 25 basis points to 6.25% in an attempt to cool inflation. Nevertheless, the central bank did its best to reassure investors by advising that the likelihood of further rate increases in the “immediate future is relatively low”. Reassuringly, later in the month, the Central Statistical Office reported the rate of inflation had slowed during October.
According to recent data released by the Investment Management Association, the Global Emerging Markets sector was the best-selling fund sector during October, experiencing its highest-ever monthly sales.
Vist our main website http://www.sterlingfs.co.uk/home/
After generating relatively strong returns during October, share prices in emerging markets fell back during November. The MSCI Emerging Markets index declined by 2.7% in US dollar terms during the month, and underlying markets showed a mixed performance.
The Organisation for Economic Cooperation & Development (OECD) reduced its forecast for global growth during 2011 from 4.5% to 4.2%, but believes growth in many emerging economies will remain relatively strong.
The OECD expects China’s economy to expand by 10.5% during 2010 and by 9.7% in 2011, while India is forecast to grow by 9.1% this year and 8.2% next year. Russia is expected to generate economic growth of 3.7% in 2010, accelerating to 4.2% in 2011. Meanwhile, Brazil’s economy is tipped to expand by 7.5% in 2010, and then to slow to 4.3% in 2011. The latter’s Bovespa index fell during November, dropping more than 4%.
News the US Federal Reserve had decided to expand its asset purchasing programme by $600bn (£380bn) was not universally well received by leaders and policymakers in developing countries, who fear the measures are likely to fuel ongoing inflationary pressures.
Meanwhile, friction over exchange rates continued between the US and China. During the month, the OECD urged China to allow its currency to appreciate, commenting: “The stability of the domestic economy would be enhanced if the exchange-rate policy were more oriented to allowing appreciation.”
In China, the rate of inflation surged during October to 4.4%, compared with a rise of 3.6% during September. In order to combat inflation, China twice increased the amount of funds that lenders must hold in reserve during the month. The Shanghai Composite Index fell by 5.3% during November.
India’s economy expanded by an annualised 8.9% between July and September and policymakers increased the country’s interest rates by 25 basis points to 6.25% in an attempt to cool inflation. Nevertheless, the central bank did its best to reassure investors by advising that the likelihood of further rate increases in the “immediate future is relatively low”. Reassuringly, later in the month, the Central Statistical Office reported the rate of inflation had slowed during October.
According to recent data released by the Investment Management Association, the Global Emerging Markets sector was the best-selling fund sector during October, experiencing its highest-ever monthly sales.
Vist our main website http://www.sterlingfs.co.uk/home/
Japanese companies buck global trend
Positive economic data from the US provided a much-needed boost for investor sentiment in Japan during November. The Nikkei 225 Stock Average index bucked the global trend by rising during the month while most major equity markets registered declines.
The Nikkei 225 rose by 8% over November as a whole, also reaching its highest closing point since June during the month. The yen softened during November, boosting investor sentiment towards Japanese exporters although, according to recent data released by the Investment Management Association, Japanese equity funds experienced net outflows during October.
Japan’s economy expanded more quickly than expected during the third quarter, rising by 3.9% year on year. However, the strong yen and its effects on export activity are likely to have an adverse effect on growth during the fourth quarter. Machinery orders declined by 9.2% during September compared with August. A survey of Japanese machinery manufacturers suggested they expect total machinery orders to fall by 2% during the fourth quarter of 2010 compared with the third quarter, while orders from the private sector are expected to fall by 9.8%.
In a speech delivered during November, the governor of the Bank of Japan (BoJ) warned that the pace of recovery is likely to remain slow “for the time being”, held back by sluggish economic growth elsewhere in the world and the strength of the yen. Nevertheless, he expects to see “a moderate recovery” during fiscal 2011 as export growth improves and corporate and household spending picks up. According to minutes from the BoJ’s October meeting, board members suggested purchases of real estate investment trusts and exchange-traded funds might boost investor sentiment and hence provide a catalyst for transactions.
The Organisation for Economic Growth & Cooperation (OECD) expects Japan’s economy to expand by 3.7% during 2010, before decelerating sharply to register growth of just 1.7% in 2011. The OECD gave a relatively downbeat assessment of Japan’s economic prospects, believing the current environment of price deflation and high unemployment is likely to persist.
Consumer confidence declined to its lowest level for seven months during October, and retail sales fell for the first time this year, dropping by 0.2% year on year. Deflation remains a problem, and prices fell by 0.6% year on year during October. Nevertheless, the Governor of the BoJ expects annualised growth in inflation to enter positive territory during fiscal 2011 as the balance of supply and demand improves.
The Nikkei 225 rose by 8% over November as a whole, also reaching its highest closing point since June during the month. The yen softened during November, boosting investor sentiment towards Japanese exporters although, according to recent data released by the Investment Management Association, Japanese equity funds experienced net outflows during October.
Japan’s economy expanded more quickly than expected during the third quarter, rising by 3.9% year on year. However, the strong yen and its effects on export activity are likely to have an adverse effect on growth during the fourth quarter. Machinery orders declined by 9.2% during September compared with August. A survey of Japanese machinery manufacturers suggested they expect total machinery orders to fall by 2% during the fourth quarter of 2010 compared with the third quarter, while orders from the private sector are expected to fall by 9.8%.
In a speech delivered during November, the governor of the Bank of Japan (BoJ) warned that the pace of recovery is likely to remain slow “for the time being”, held back by sluggish economic growth elsewhere in the world and the strength of the yen. Nevertheless, he expects to see “a moderate recovery” during fiscal 2011 as export growth improves and corporate and household spending picks up. According to minutes from the BoJ’s October meeting, board members suggested purchases of real estate investment trusts and exchange-traded funds might boost investor sentiment and hence provide a catalyst for transactions.
The Organisation for Economic Growth & Cooperation (OECD) expects Japan’s economy to expand by 3.7% during 2010, before decelerating sharply to register growth of just 1.7% in 2011. The OECD gave a relatively downbeat assessment of Japan’s economic prospects, believing the current environment of price deflation and high unemployment is likely to persist.
Consumer confidence declined to its lowest level for seven months during October, and retail sales fell for the first time this year, dropping by 0.2% year on year. Deflation remains a problem, and prices fell by 0.6% year on year during October. Nevertheless, the Governor of the BoJ expects annualised growth in inflation to enter positive territory during fiscal 2011 as the balance of supply and demand improves.
The EU and IMF bailout Ireland
The MSCI Europe ex UK index fell by 4% in euro terms during November as Ireland’s debt crisis dominated the news. Nevertheless some markets within the region performed well and, in Germany, the DAX index generated positive returns over a month in which it reached a two-year high.
Struggling under the weight of its massive budget deficit, Ireland capitulated and approached the European Union and International Monetary Fund for a financial bailout worth €85bn (£72bn), of which. €50bn will go towards government spending and €35bn will be used to support Ireland’s ailing banking sector. An average interest rate of 5.8% will be paid on the loan. Ireland then announced measures to reduce its deficit, including spending cuts, a reduction in the minimum wage and higher taxes – however, the country’s low rate of corporation tax remains unchanged.
Although there was some relief the uncertainty surrounding Ireland’s predicament had been eased, November’s events fuelled concerns about other heavily indebted economies within the eurozone. The euro weakened as investors avoided the region’s assets amid escalating fears the debt crisis will deepen and spread, derailing the eurozone’s economic recovery.
The eurozone’s economy expanded 1.9%, year on year, during the third quarter of 2010. The Organisation for Economic Cooperation & Development (OECD) now expects the grouping’s economy to expand by 1.7% in 2010 and 2011 and by 2% in 2012. Government spending cuts and tax increases in some eurozone nations are likely to hold back growth across the region as a whole and, warned the OECD, “the pace of recovery is likely to be muted”.
Prices across the eurozone rose by 1.9% during October, compared with 1.8% in September, while unemployment reached 10.1% during October, compared with 10.0% the month before. Unemployment in the region is highest in Spain, with an unemployment rate of 20.7%.
Over 2010 as a whole, the OECD expects Spain’s economy to contract by 0.2%, while Germany’s is forecast to expand by 3.5%. Greece is expected to shrink by 3.9% this year and 2.7% next year, before returning to growth in 2012. Portugal’s economy is tipped to expand by 1.5% this year and to contract by 0.2% next year. The OECD warned that Portugal must “strictly” implement its plans to cut its budget deficit.
According to recent data released by the Investment Management Association, funds within the Europe excluding UK sector experienced net outflows during October, although European Smaller Company funds proved slightly more popular.
Struggling under the weight of its massive budget deficit, Ireland capitulated and approached the European Union and International Monetary Fund for a financial bailout worth €85bn (£72bn), of which. €50bn will go towards government spending and €35bn will be used to support Ireland’s ailing banking sector. An average interest rate of 5.8% will be paid on the loan. Ireland then announced measures to reduce its deficit, including spending cuts, a reduction in the minimum wage and higher taxes – however, the country’s low rate of corporation tax remains unchanged.
Although there was some relief the uncertainty surrounding Ireland’s predicament had been eased, November’s events fuelled concerns about other heavily indebted economies within the eurozone. The euro weakened as investors avoided the region’s assets amid escalating fears the debt crisis will deepen and spread, derailing the eurozone’s economic recovery.
The eurozone’s economy expanded 1.9%, year on year, during the third quarter of 2010. The Organisation for Economic Cooperation & Development (OECD) now expects the grouping’s economy to expand by 1.7% in 2010 and 2011 and by 2% in 2012. Government spending cuts and tax increases in some eurozone nations are likely to hold back growth across the region as a whole and, warned the OECD, “the pace of recovery is likely to be muted”.
Prices across the eurozone rose by 1.9% during October, compared with 1.8% in September, while unemployment reached 10.1% during October, compared with 10.0% the month before. Unemployment in the region is highest in Spain, with an unemployment rate of 20.7%.
Over 2010 as a whole, the OECD expects Spain’s economy to contract by 0.2%, while Germany’s is forecast to expand by 3.5%. Greece is expected to shrink by 3.9% this year and 2.7% next year, before returning to growth in 2012. Portugal’s economy is tipped to expand by 1.5% this year and to contract by 0.2% next year. The OECD warned that Portugal must “strictly” implement its plans to cut its budget deficit.
According to recent data released by the Investment Management Association, funds within the Europe excluding UK sector experienced net outflows during October, although European Smaller Company funds proved slightly more popular.
Friday, 12 November 2010
Better than expected corporate profits lifts US stock market
Equity prices in the US rose during October, with those increases broadly in line with that of the MSCI World index. The S&P 500 index rose by 3.7% and the Dow Jones Industrial Average index by 3.1% while the technology-heavy Nasdaq index posted an increase of 5.9%.
Investors were distracted by the approaching mid-term elections, while sentiment was unsettled by mounting– and ultimately well-founded – speculation the US Federal Reserve would opt to boost the US’s flagging economic recovery by introducing another round of quantitative easing. Demand for US equity funds has picked up, and the IMA’s North America sector experienced strong net retail sales compared with many other IMA equity sectors.
According to Standard & Poor’s, during the first nine months of 2010, 117 US companies cut their dividend payments, compared with 730 companies during the same period in 2009. Meanwhile, 1,033 companies opted to increase their payout during the first nine months of 2010 – 46% higher than the same period last year.
Microsoft reported a 51% rise in first-quarter earnings that were boosted by stronger corporate purchases of PCs. Meanwhile, Intel reported better-than-expected profits for its third quarter and “continues to see healthy worldwide demand for computing products”.
Elsewhere, the banking sector garnered attention with some strong results. JP Morgan reported a 23% increase in profits for the third quarter, although revenues at its investment banking division fell. For its part, Citigroup reported better-than-expected profits amid a decline in losses from bad loans.
The US economy posted annualised growth of 2% during the third quarter, stoking speculation the Fed would expand its programme of monetary stimulus. Calls for additional quantitative easing received additional fuel from the news inflation had risen more slowly than expected during September.
According to the Treasury Department, the US registered its second consecutive annual budget deficit above the $1 trillion (£620bn) level. Tax receipts were held back by the continued high rate of unemployment, which is running at 9.6%.
Speculation over the probability of further quantitative easing helped the US dollar to fall to a 15-year low against the yen. Meanwhile, the US remained preoccupied by China’s currency policy – it believes the yuan remains significantly undervalued, providing China with an unfair advantage in its global trade activities. According to figures released during October, the US trade deficit widened during August compared with July – China’s exports to the US rose to $35.3bn, while US imports fell to $7.3bn.
Sterling financial services
Investors were distracted by the approaching mid-term elections, while sentiment was unsettled by mounting– and ultimately well-founded – speculation the US Federal Reserve would opt to boost the US’s flagging economic recovery by introducing another round of quantitative easing. Demand for US equity funds has picked up, and the IMA’s North America sector experienced strong net retail sales compared with many other IMA equity sectors.
According to Standard & Poor’s, during the first nine months of 2010, 117 US companies cut their dividend payments, compared with 730 companies during the same period in 2009. Meanwhile, 1,033 companies opted to increase their payout during the first nine months of 2010 – 46% higher than the same period last year.
Microsoft reported a 51% rise in first-quarter earnings that were boosted by stronger corporate purchases of PCs. Meanwhile, Intel reported better-than-expected profits for its third quarter and “continues to see healthy worldwide demand for computing products”.
Elsewhere, the banking sector garnered attention with some strong results. JP Morgan reported a 23% increase in profits for the third quarter, although revenues at its investment banking division fell. For its part, Citigroup reported better-than-expected profits amid a decline in losses from bad loans.
The US economy posted annualised growth of 2% during the third quarter, stoking speculation the Fed would expand its programme of monetary stimulus. Calls for additional quantitative easing received additional fuel from the news inflation had risen more slowly than expected during September.
According to the Treasury Department, the US registered its second consecutive annual budget deficit above the $1 trillion (£620bn) level. Tax receipts were held back by the continued high rate of unemployment, which is running at 9.6%.
Speculation over the probability of further quantitative easing helped the US dollar to fall to a 15-year low against the yen. Meanwhile, the US remained preoccupied by China’s currency policy – it believes the yuan remains significantly undervalued, providing China with an unfair advantage in its global trade activities. According to figures released during October, the US trade deficit widened during August compared with July – China’s exports to the US rose to $35.3bn, while US imports fell to $7.3bn.
Sterling financial services
UK equities reach a six month high
October saw share prices in the UK reach their highest levels since April. By the end of the month, the FTSE 100 index had risen by 2.3% although returns from the blue-chip index were outstripped by the performance of the FTSE 250 and FTSE SmallCap indices.
Which posted gains of 2.5% and 2.9% respectively during October, suggesting investors are becoming more sanguine about prospects for medium-sized and smaller companies.
Investors were distracted by ongoing speculation about the likelihood of further quantitative easing measures on both sides of the Atlantic and strengthening expectations the Federal Reserve was poised to inject more cash into the US economy in particular provided a reassuring boost for share prices.
According to the Office for National Statistics, retail sales growth continues to slow. Sales declined by 0.2% month on month during September, fuelling concerns that economic recovery is starting to lose momentum just as the coalition Government seeks to implement harsh cuts in public spending.
In a trading statement, high-street retailer Marks & Spencer warned trading conditions are likely to become “more challenging” in the light of Government spending cuts, a scheduled rise in VAT in January and higher commodity prices. Meanwhile, the Nationwide Building Society reported its measure of consumer confidence had moved back towards its historical low, and warned consumers were showing signs of becoming increasingly pessimistic about their own spending power.
Standard Chartered announced a £3.3bn rights issue, in which investors will be offered one new share at 1280p for every eight shares they already own. The bank is seeking to raise capital in order to increase its financial strength. Under new regulations, banks must have a Core Tier 1 capital ratio of at least 7%, and the rights issue will increase Standard Chartered’s ratio to more than 10%. The move triggered speculation other big banks will follow suit in due course.
According to recent figures published by the Investment Management Association (IMA), net retail sales of funds during the first nine months of 2010 are only just behind the record levels experienced over the same period in 2009.
Investors continued to add to their holdings during September, and bonds remained the most popular asset class, followed by equities. However, the UK All Companies sector was the worst-selling IMA sector during September for both retail and institutional investors, although the UK Smaller Companies sector experienced positive net inflows.
www.sterlingfs.co.uk
Which posted gains of 2.5% and 2.9% respectively during October, suggesting investors are becoming more sanguine about prospects for medium-sized and smaller companies.
Investors were distracted by ongoing speculation about the likelihood of further quantitative easing measures on both sides of the Atlantic and strengthening expectations the Federal Reserve was poised to inject more cash into the US economy in particular provided a reassuring boost for share prices.
According to the Office for National Statistics, retail sales growth continues to slow. Sales declined by 0.2% month on month during September, fuelling concerns that economic recovery is starting to lose momentum just as the coalition Government seeks to implement harsh cuts in public spending.
In a trading statement, high-street retailer Marks & Spencer warned trading conditions are likely to become “more challenging” in the light of Government spending cuts, a scheduled rise in VAT in January and higher commodity prices. Meanwhile, the Nationwide Building Society reported its measure of consumer confidence had moved back towards its historical low, and warned consumers were showing signs of becoming increasingly pessimistic about their own spending power.
Standard Chartered announced a £3.3bn rights issue, in which investors will be offered one new share at 1280p for every eight shares they already own. The bank is seeking to raise capital in order to increase its financial strength. Under new regulations, banks must have a Core Tier 1 capital ratio of at least 7%, and the rights issue will increase Standard Chartered’s ratio to more than 10%. The move triggered speculation other big banks will follow suit in due course.
According to recent figures published by the Investment Management Association (IMA), net retail sales of funds during the first nine months of 2010 are only just behind the record levels experienced over the same period in 2009.
Investors continued to add to their holdings during September, and bonds remained the most popular asset class, followed by equities. However, the UK All Companies sector was the worst-selling IMA sector during September for both retail and institutional investors, although the UK Smaller Companies sector experienced positive net inflows.
www.sterlingfs.co.uk
Tuesday, 26 October 2010
Is there a shift in economic power to the emerging markets?
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.
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.
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
Main site
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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www.sterlingfs.co.uk
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.
Monday, 27 September 2010
A guide to Structured products
Structured products sometimes known as Future Value Products are investment vehicles designed for investors who wish to combine the potential upside of stock market growth with a guarantee that they will get their original investment back. There are also products, which will provide a higher potential return with an element of risk to capital, which are known as Structured Capital At Risk Products (SCARPS).
Structured retail products (SRPs) first appeared around 20 years ago in the UK. When they were launched in general the retail products were investment bond-based, promising a simple percentage return of the FTSE index or your money back over typically a five year term. Life companies were the natural starting point for such offerings because they could provide a guarantee (not 'protection'), but for a variety of mostly tax reasons other wrappers later emerged.
In today's more sophisticated and demanding investment marketplace there is a vast offering of different SRPs available with new offerings being promoted on a regular basis.
Among the main features of products are:
* Fixed terms - Most plans have a fixed term, more often than not between five and six years, to meet the eligibility rules for the stocks and shares component of an ISA. There are also a number of variants known as kick out plans where if the market performs in a particular way the plan will mature yearly with a specified return.
* Capital protection- Many products will offer less than 100% protection although the 100% floor remains quite common and popular.
* Formula-based returns Structured products generally have formula-based returns. It is important to understand the formula because with an SRP what you see is what you get.
* Complex structures - Probably the most common index utilised in these plans in the UK is the FTSE 100, but there are many more complex structures available now, with kick outs, accelerated growth, capping and even positive returns for negative market movements
What factors should be considered when considering a structured product?
Asset class - as mentioned the majority of plans are linked to the performance of the FTSE 100, although it is possible to find a few other asset links, e.g. a house price index, individual funds or non-UK indices. Performance is generally based on pure capital index performance, i.e. no account is taken of income. That can make a considerable difference for FTSE 100 plans: the approximate current net dividend yield on the FTSE is 5.75%, which would accumulate to 32% of the original investment over five years.
Hard protection - Hard protection means a fixed level of protection, regardless of asset class performance.
Soft Protection - with soft protection, the protection falls away if the asset value breaks a given barrier, typically 50% of the initial level.
Counterparty risk - Products will often involve three parties: a product provider, an out-sourced administrator and a supplier of the underlying derivative-based investment (the counterparty). The counterparty is usually a bank and, if it fails, the SRP could become worthless: SRPs (other than deposits) are protected, not guaranteed.
Averaging - The formula-based returns of plans often use more than just an index reading at the start and end of the product term. For example, in growth plans the final reading may be averaged over six or twelve months. This means last minute crashes (and spikes) are dampened. However, in theory it will also mean more often than not a lower final reading than if there had been no averaging and only an end point value had been taken.
Gearing- Some plans offer considerable gearing. For instance, it is possible to find plans that offer 4 times the growth in the FTSE 100, albeit with a cap. High gearing normally comes at the cost of soft rather than hard protection, but can be very attractive if market performance is only modestly upwards.
Tax - The product format of products is often driven by tax considerations. Most growth products are subject to capital gains tax, although matters get more complicated when there is a 100%+ minimum return. For many investors, wrapping growth products in an ISA is a waste: the capital gains tax annual exemption will suffice
With the current investment climate and high levels of volatility still being experienced this could point to continued growth in the Structured Product market over the remainder of 2009. These plans have the potential to give investors higher returns than current deposit accounts with downside protection. However if there is a significant change in interest rates due to high inflation for example then most plans will penalise the investor if they want to withdraw prior to the maturity date to invest elsewhere.
Structured Retail Products and the risk involved particularly in relation to counterparty risks need to be understood at outset by the investor. In practice that means the role of a good Independent Financial Adviser (IFA) is vital
DreamHost reviews
Structured retail products (SRPs) first appeared around 20 years ago in the UK. When they were launched in general the retail products were investment bond-based, promising a simple percentage return of the FTSE index or your money back over typically a five year term. Life companies were the natural starting point for such offerings because they could provide a guarantee (not 'protection'), but for a variety of mostly tax reasons other wrappers later emerged.
In today's more sophisticated and demanding investment marketplace there is a vast offering of different SRPs available with new offerings being promoted on a regular basis.
Among the main features of products are:
* Fixed terms - Most plans have a fixed term, more often than not between five and six years, to meet the eligibility rules for the stocks and shares component of an ISA. There are also a number of variants known as kick out plans where if the market performs in a particular way the plan will mature yearly with a specified return.
* Capital protection- Many products will offer less than 100% protection although the 100% floor remains quite common and popular.
* Formula-based returns Structured products generally have formula-based returns. It is important to understand the formula because with an SRP what you see is what you get.
* Complex structures - Probably the most common index utilised in these plans in the UK is the FTSE 100, but there are many more complex structures available now, with kick outs, accelerated growth, capping and even positive returns for negative market movements
What factors should be considered when considering a structured product?
Asset class - as mentioned the majority of plans are linked to the performance of the FTSE 100, although it is possible to find a few other asset links, e.g. a house price index, individual funds or non-UK indices. Performance is generally based on pure capital index performance, i.e. no account is taken of income. That can make a considerable difference for FTSE 100 plans: the approximate current net dividend yield on the FTSE is 5.75%, which would accumulate to 32% of the original investment over five years.
Hard protection - Hard protection means a fixed level of protection, regardless of asset class performance.
Soft Protection - with soft protection, the protection falls away if the asset value breaks a given barrier, typically 50% of the initial level.
Counterparty risk - Products will often involve three parties: a product provider, an out-sourced administrator and a supplier of the underlying derivative-based investment (the counterparty). The counterparty is usually a bank and, if it fails, the SRP could become worthless: SRPs (other than deposits) are protected, not guaranteed.
Averaging - The formula-based returns of plans often use more than just an index reading at the start and end of the product term. For example, in growth plans the final reading may be averaged over six or twelve months. This means last minute crashes (and spikes) are dampened. However, in theory it will also mean more often than not a lower final reading than if there had been no averaging and only an end point value had been taken.
Gearing- Some plans offer considerable gearing. For instance, it is possible to find plans that offer 4 times the growth in the FTSE 100, albeit with a cap. High gearing normally comes at the cost of soft rather than hard protection, but can be very attractive if market performance is only modestly upwards.
Tax - The product format of products is often driven by tax considerations. Most growth products are subject to capital gains tax, although matters get more complicated when there is a 100%+ minimum return. For many investors, wrapping growth products in an ISA is a waste: the capital gains tax annual exemption will suffice
With the current investment climate and high levels of volatility still being experienced this could point to continued growth in the Structured Product market over the remainder of 2009. These plans have the potential to give investors higher returns than current deposit accounts with downside protection. However if there is a significant change in interest rates due to high inflation for example then most plans will penalise the investor if they want to withdraw prior to the maturity date to invest elsewhere.
Structured Retail Products and the risk involved particularly in relation to counterparty risks need to be understood at outset by the investor. In practice that means the role of a good Independent Financial Adviser (IFA) is vital
DreamHost reviews
Friday, 24 September 2010
The Bank of England
The Bank of England pervades the very fabric of our everyday lives. Barely noticeable to many, evidence of its activities confronts us dozens of times a day, every time we see a banknote or log on to our account. This venerable institution – the “Old Lady” of Threadneedle Street – has been with us for over three hundred years, and has provided a model for central banks around the globe. Its function has evolved from its original role of banker to the English government to its current, wide-ranging responsibility for the monetary and financial stability of the entire United Kingdom.
Banker to the government
The Bank of England (BoE) was established in 1694, six years after the accession of William and Mary. At the time they took the throne, James II had been overthrown, England was at war and the country’s finances were in chaos.
The Amsterdam Wisselbank, founded in 1609, had evolved into a successful and stable model of a central bank that had made a significant contribution to the success and stability of the Dutch economy. Scottish entrepreneur William Paterson began to argue the need for a similar institution in England, proposing a loan of £1,200,000 to the government. His scheme was approved, and a group of subscribers put up the money that became the initial capital stock of the BoE, to be lent on to the government to finance spending projects. In return, the government granted the bank’s Royal Charter, and the subscribers were incorporated as “The Governor and Company of the Bank of England”, with Sir John Houblon as the first governor.
Banker to the banks, and the birth of monetarism
At the beginning of its life, the BoE’s only role was banker to the government but, during the eighteenth century, the BoE became the banker to other banks. However, the BoE ran the risk of collapse if depositors tried to withdraw all their money at once, so the BoE had to ensure that it maintained enough gold in reserve to cover this contingency. The depredations of the Napoleonic Wars sapped the BoE’s gold reserves, so the government forbade the bank from converting its notes into gold, a move that led to a surge in inflation that was blamed primarily on the BoE having printed too much paper. An investigating Parliamentary Select Committee concluded that paper currency that could not be converted into gold or silver could only retain its value by limiting the amount of paper issued and, with this decree, the concept of monetarism was created.
Taking control of Britain’s finances
Banking crises during the nineteenth century spurred the BoE to assume responsibility for the stability of the entire UK banking system, taking on its role as “lender of last resort”. The nineteenth century saw the BoE become the primary issuer of banknotes in England and Wales through the Bank Charter Act of 1844, which prohibited the issuance of new notes by banks. Many small banks had printed notes, undermining monetary discipline in the UK. However, the new Act stated that the issuance of banknotes by the BoE would be tied to the bank’s gold reserves, a move that led to the establishment of the Gold Standard. Moreover, the BoE had to separate the accounts of its banknote issuance from those of its banking operations, and to provide weekly summaries of both accounts. This “Bank Return” is still published every week.
During the eighteenth century, the government borrowed an increasing amount of money, which became known as the National Debt. During the First World War, the UK’s National Debt soared to £7 billion, and the BoE assisted in the management of government borrowing and the fight against inflation.
An independent Bank of England?
In 1931, the UK left the Gold Standard and its gold and foreign exchange reserves were handed to the UK Treasury, although the BoE continued to carry out their administration. The BoE was nationalised in 1946, following the end of the Second World War. Almost fifty years later, in 1997, it was given responsibility for setting UK interest rates, independent of any operational interference from the government. The BoE’s Monetary Policy Committee’s (MPC’s) task is to ensure that UK inflation meets a government-set target (currently 2%). If inflation falls more than one percentage point outside this target, the BoE’s governor has to write an open letter to the Chancellor of the Exchequer, outlining the reasons for the failure to meet the target, and explaining how he intends to resolve the problem. Interest rates are reviewed by the MPC at a monthly meeting.
However, the BoE’s independence does not necessarily equate to autonomy. The MPC’s relatively narrow brief – focusing on inflation – is likely to become increasingly problematic in coming months. The UK has lurched from concerns about soaring prices to worries about deflation in the space of a few months; however, an environment of deflation cannot be averted purely through monetary policy, so the BoE and the government might well be obliged to work together more closely. Any hint that the MPC’s interest-rate decisions are being influenced by the government would not only compromise the BoE’s much-vaunted independence, but could also raise the prospect of interest-rate policy being harnessed for short-term political gain rather than for the long-term monetary strength for the UK. Only time will tell the outcome; however, it seems likely that the Old Lady’s role will continue to evolve.
Banker to the government
The Bank of England (BoE) was established in 1694, six years after the accession of William and Mary. At the time they took the throne, James II had been overthrown, England was at war and the country’s finances were in chaos.
The Amsterdam Wisselbank, founded in 1609, had evolved into a successful and stable model of a central bank that had made a significant contribution to the success and stability of the Dutch economy. Scottish entrepreneur William Paterson began to argue the need for a similar institution in England, proposing a loan of £1,200,000 to the government. His scheme was approved, and a group of subscribers put up the money that became the initial capital stock of the BoE, to be lent on to the government to finance spending projects. In return, the government granted the bank’s Royal Charter, and the subscribers were incorporated as “The Governor and Company of the Bank of England”, with Sir John Houblon as the first governor.
Banker to the banks, and the birth of monetarism
At the beginning of its life, the BoE’s only role was banker to the government but, during the eighteenth century, the BoE became the banker to other banks. However, the BoE ran the risk of collapse if depositors tried to withdraw all their money at once, so the BoE had to ensure that it maintained enough gold in reserve to cover this contingency. The depredations of the Napoleonic Wars sapped the BoE’s gold reserves, so the government forbade the bank from converting its notes into gold, a move that led to a surge in inflation that was blamed primarily on the BoE having printed too much paper. An investigating Parliamentary Select Committee concluded that paper currency that could not be converted into gold or silver could only retain its value by limiting the amount of paper issued and, with this decree, the concept of monetarism was created.
Taking control of Britain’s finances
Banking crises during the nineteenth century spurred the BoE to assume responsibility for the stability of the entire UK banking system, taking on its role as “lender of last resort”. The nineteenth century saw the BoE become the primary issuer of banknotes in England and Wales through the Bank Charter Act of 1844, which prohibited the issuance of new notes by banks. Many small banks had printed notes, undermining monetary discipline in the UK. However, the new Act stated that the issuance of banknotes by the BoE would be tied to the bank’s gold reserves, a move that led to the establishment of the Gold Standard. Moreover, the BoE had to separate the accounts of its banknote issuance from those of its banking operations, and to provide weekly summaries of both accounts. This “Bank Return” is still published every week.
During the eighteenth century, the government borrowed an increasing amount of money, which became known as the National Debt. During the First World War, the UK’s National Debt soared to £7 billion, and the BoE assisted in the management of government borrowing and the fight against inflation.
An independent Bank of England?
In 1931, the UK left the Gold Standard and its gold and foreign exchange reserves were handed to the UK Treasury, although the BoE continued to carry out their administration. The BoE was nationalised in 1946, following the end of the Second World War. Almost fifty years later, in 1997, it was given responsibility for setting UK interest rates, independent of any operational interference from the government. The BoE’s Monetary Policy Committee’s (MPC’s) task is to ensure that UK inflation meets a government-set target (currently 2%). If inflation falls more than one percentage point outside this target, the BoE’s governor has to write an open letter to the Chancellor of the Exchequer, outlining the reasons for the failure to meet the target, and explaining how he intends to resolve the problem. Interest rates are reviewed by the MPC at a monthly meeting.
However, the BoE’s independence does not necessarily equate to autonomy. The MPC’s relatively narrow brief – focusing on inflation – is likely to become increasingly problematic in coming months. The UK has lurched from concerns about soaring prices to worries about deflation in the space of a few months; however, an environment of deflation cannot be averted purely through monetary policy, so the BoE and the government might well be obliged to work together more closely. Any hint that the MPC’s interest-rate decisions are being influenced by the government would not only compromise the BoE’s much-vaunted independence, but could also raise the prospect of interest-rate policy being harnessed for short-term political gain rather than for the long-term monetary strength for the UK. Only time will tell the outcome; however, it seems likely that the Old Lady’s role will continue to evolve.
Thursday, 23 September 2010
Multi Manager Investment funds
There are now over 2,000 UK domiciled funds available to investors, plus an array of offshore funds. Few of these funds' managers are going to deliver good returns consistently so how do you increase your chances of choosing the best ones?
Multi-managers are experts in fund selection. They research the whole market and can also uncover hidden gems that may not even be available to private investors. They then meet the fund managers individually and quiz them on how they intend to achieve long-term performance. Multi-managers will also be experts in combining different funds together to minimise risk and maximise returns. The two main types are fund of funds and manager of managers. Fund of funds managers build portfolios based on their research and will then buy or sell funds based on changing performance potential and market conditions. Typically these portfolios will be split into cautious, balanced or aggressive, with different weightings in different assets. Manager of managers funds invest allocations of a portfolio with pre-selected managers and give those manager specific pots of money, along with specific guidelines as to how that money should be run to meet their objectives.
Multi-manager funds can be a useful one-stop-shop solution as a ‘core’ investment where they can form the bedrock of your wider portfolio. Alternatively, for beginners or the more cautious investor, they are an ideal route into the wider world of market and equity investment
Multi-managers are experts in fund selection. They research the whole market and can also uncover hidden gems that may not even be available to private investors. They then meet the fund managers individually and quiz them on how they intend to achieve long-term performance. Multi-managers will also be experts in combining different funds together to minimise risk and maximise returns. The two main types are fund of funds and manager of managers. Fund of funds managers build portfolios based on their research and will then buy or sell funds based on changing performance potential and market conditions. Typically these portfolios will be split into cautious, balanced or aggressive, with different weightings in different assets. Manager of managers funds invest allocations of a portfolio with pre-selected managers and give those manager specific pots of money, along with specific guidelines as to how that money should be run to meet their objectives.
Multi-manager funds can be a useful one-stop-shop solution as a ‘core’ investment where they can form the bedrock of your wider portfolio. Alternatively, for beginners or the more cautious investor, they are an ideal route into the wider world of market and equity investment
Wednesday, 22 September 2010
Absolute Return investment funds
When equity and bond markets become increasingly unpredictable, the thought of a fund that might deliver positive returns year after year becomes more appealing. The evolution of this principle has resulted in a new breed of ‘absolute return’ funds which, while they do not come with any guarantees, set out to beat the returns on cash AND avoid the fluctuations of the markets.
This new generation of funds is quite sophisticated and uses a variety of different techniques to achieve their goals. One of the most popular is the multi-asset strategy which blends traditional asset classes like equities and bonds with alternative asset classes such as hedge funds, gold or private equity. In times like now, when the mainstream asset classes are volatile or losing money, these managers at least have the opportunity to invest in assets delivering positive returns.
The other popular technique is to invest purely in equities, but to 'short' some of those stocks as well – ie: borrow more stock from someone else, sell it and then buy it back at a later date. There is a small price for borrowing but if the market moves down, the manager buys back the stock at a lower price than it was sold, thereby making a profit in the turnover. This acts like an insurance policy, counteracting some of the loss made on the actual fund holdings which will have fallen over the same period.
When you short stock you own, this is called ‘hedging’, allowing a manager to make some money whichever way the market goes – profiting on their actual holdings if it moves up and profiting on the borrowed stocks if it moves down. Overall, if the market moves up you profit a little less because of the payment made to borrow stock and the increment in cost to buy it back. However, if it moves down, you lose out less because the insurance policy of shorting balances some of it out. The result is smoother returns with lower peaks but also fewer shocks.
This approach looks set to be the focus for imminent new launches in the absolute return arena, but it is no panacea. Shorting stock is a particular skill and in the wrong hands can perform just as badly as, and sometimes even worse than, a traditional equity investment. So, despite the label 'Absolute', always remember that this is an objective rather than a guarantee. These funds are not suitable if you cannot take the risk of losing capital. However, managed well, they could represent an exciting alternative to traditional equity and bond funds for investors seeking smoother market returns.
This new generation of funds is quite sophisticated and uses a variety of different techniques to achieve their goals. One of the most popular is the multi-asset strategy which blends traditional asset classes like equities and bonds with alternative asset classes such as hedge funds, gold or private equity. In times like now, when the mainstream asset classes are volatile or losing money, these managers at least have the opportunity to invest in assets delivering positive returns.
The other popular technique is to invest purely in equities, but to 'short' some of those stocks as well – ie: borrow more stock from someone else, sell it and then buy it back at a later date. There is a small price for borrowing but if the market moves down, the manager buys back the stock at a lower price than it was sold, thereby making a profit in the turnover. This acts like an insurance policy, counteracting some of the loss made on the actual fund holdings which will have fallen over the same period.
When you short stock you own, this is called ‘hedging’, allowing a manager to make some money whichever way the market goes – profiting on their actual holdings if it moves up and profiting on the borrowed stocks if it moves down. Overall, if the market moves up you profit a little less because of the payment made to borrow stock and the increment in cost to buy it back. However, if it moves down, you lose out less because the insurance policy of shorting balances some of it out. The result is smoother returns with lower peaks but also fewer shocks.
This approach looks set to be the focus for imminent new launches in the absolute return arena, but it is no panacea. Shorting stock is a particular skill and in the wrong hands can perform just as badly as, and sometimes even worse than, a traditional equity investment. So, despite the label 'Absolute', always remember that this is an objective rather than a guarantee. These funds are not suitable if you cannot take the risk of losing capital. However, managed well, they could represent an exciting alternative to traditional equity and bond funds for investors seeking smoother market returns.
Tuesday, 21 September 2010
Regular saving
In the world of investment, timing is everything. However, no matter how much hype we hear to the contrary, it is a fact that no one can predict what the market will do or when. This makes it difficult, not only deciding when to invest but also when to pull your valuable investments out of the market.
This is where the benefits of pound cost averaging come into play – or in layman’s terms, regular savings. The theory is that by regularly putting smaller amounts of money into a fund or other investment, the risk of getting your timing wrong is reduced. Compared with punting an entire large lump sum in one go at a single price, the risk is mitigated by the fact your smaller sums will buy in at a variety of prices.
In a rising market, regular savings would underperform the growth of a single lump sum as the later investments would miss out on that rise in the early days. However, in an up-and-down or falling market, the opposite is true. Later investments would buy in at lower or alternating prices - some lower than the original price - and would therefore gain a little more when the market finally did rise.
Similarly, regular saving is a great way to build up a lump sum from zero. A lump sum of £5,000 can seem a tall order for some people. However, putting aside £100 a month from your income is less of an issue - and with investment growth or interest added you can quickly build up a reasonable amount without really noticing. The longer you leave it, the more impressive that growing amount potentially becomes.
This is where the benefits of pound cost averaging come into play – or in layman’s terms, regular savings. The theory is that by regularly putting smaller amounts of money into a fund or other investment, the risk of getting your timing wrong is reduced. Compared with punting an entire large lump sum in one go at a single price, the risk is mitigated by the fact your smaller sums will buy in at a variety of prices.
In a rising market, regular savings would underperform the growth of a single lump sum as the later investments would miss out on that rise in the early days. However, in an up-and-down or falling market, the opposite is true. Later investments would buy in at lower or alternating prices - some lower than the original price - and would therefore gain a little more when the market finally did rise.
Similarly, regular saving is a great way to build up a lump sum from zero. A lump sum of £5,000 can seem a tall order for some people. However, putting aside £100 a month from your income is less of an issue - and with investment growth or interest added you can quickly build up a reasonable amount without really noticing. The longer you leave it, the more impressive that growing amount potentially becomes.
Friday, 17 September 2010
Where does the global recovery go from here?
With the global economy still facing strong economic headwinds from the likes of high unemployment, sovereign debt, weak international trade and indebted consumer, will the global economy be able to fully recover?
The financial crisis started in the big financial institutions in 2007 and subsequently moved into the real economy towards the end of 2008 and caused all developed nations to enter in to recession. This was disastrous for many businesses as the tighter credit conditions and reduced demand for goods and services forced companies to downsize their workforce, which in turn doubled the rate of unemployment in the UK and US. Nevertheless, since the beginning of 2010 there has been an air of optimism about job growth across the pond as the massive US stimulus package has generated approximately 2.7 million jobs (Non seasonally adjusted) and the outlook for future growth remains positive. The picture in the UK is not as promising, however, in recent business surveys the manufacturing and service sectors are in a growth cycle and many businesses are starting to rehire to meet this newfound demand. Job recovery normally lags behind economic growth by 6 to 12 months, therefore it is suspected that the UK will start to see unemployment starting to reduce by the end the year.
From the outset of the “Great Recession” it was important that government played an important role in stimulating the Economy by using a combination of tax cuts and spending to try and smooth out the decline in the economy. Moreover, many countries found it necessary to step in to stop the failure of the banking sector and to protect the public’s savings held in those institutions. Excessive Sovereign debt is a serious risk to future global growth as it reduces the ability of the government to provide services and many countries waste a large amount of their tax receipts servicing this debt. Over recent months nearly every single European country has announced massive plans to try and reduce public debt. This will not happen over night and will be a long drawn out process but with the government’s willingness to reduce borrowing this should provide benefits in the long-term, as governments will be forced to be more efficient and effective with the tax collected.
During the dark days of the global recession, international trade collapsed, with some regions reporting a 30% reduction in exports. This weak environment causes lasting damage to large and small companies alike. Nevertheless recent signs from the emerging markets suggest that trade is starting to gather pace, with countries like China and India growing rapidly on the back of international trade. Furthermore, the biggest consumers in the world (the US) are starting to put their hands in their pockets to purchase big-ticket items such as cars and widescreen televisions. This positive upward trend in retail sales across the globe is supporting the idea that the economic recovery is stronger than first predicted.
One of the many concerns in the UK is the current level of debt facing the consumers. With a decade of easy credit and a booming housing market, the average consumer indebted themselves to greater and greater extent. This debt will reduce the disposable income of the UK public in the future and could seriously damage a recovery. However, interestingly enough the average consumer has been paying their debt and saving more than ever. To expand on this idea, with house prices seemingly on the rise again and the equities enjoying a strong 12 month rally, the average consumer is now feeling more wealthily and more willing to spend their money. The retail and service sectors are still improving and the future looks far better than was predicted during the start of the recession.
The strength of the recovery is always going to be in question and there is no doubt that the economic recovery is going to be a slow and gradual process. Yet, there are currently plenty of early signs that the recovery is taking a firm hold but it might not be the growth the west is used to.
The financial crisis started in the big financial institutions in 2007 and subsequently moved into the real economy towards the end of 2008 and caused all developed nations to enter in to recession. This was disastrous for many businesses as the tighter credit conditions and reduced demand for goods and services forced companies to downsize their workforce, which in turn doubled the rate of unemployment in the UK and US. Nevertheless, since the beginning of 2010 there has been an air of optimism about job growth across the pond as the massive US stimulus package has generated approximately 2.7 million jobs (Non seasonally adjusted) and the outlook for future growth remains positive. The picture in the UK is not as promising, however, in recent business surveys the manufacturing and service sectors are in a growth cycle and many businesses are starting to rehire to meet this newfound demand. Job recovery normally lags behind economic growth by 6 to 12 months, therefore it is suspected that the UK will start to see unemployment starting to reduce by the end the year.
From the outset of the “Great Recession” it was important that government played an important role in stimulating the Economy by using a combination of tax cuts and spending to try and smooth out the decline in the economy. Moreover, many countries found it necessary to step in to stop the failure of the banking sector and to protect the public’s savings held in those institutions. Excessive Sovereign debt is a serious risk to future global growth as it reduces the ability of the government to provide services and many countries waste a large amount of their tax receipts servicing this debt. Over recent months nearly every single European country has announced massive plans to try and reduce public debt. This will not happen over night and will be a long drawn out process but with the government’s willingness to reduce borrowing this should provide benefits in the long-term, as governments will be forced to be more efficient and effective with the tax collected.
During the dark days of the global recession, international trade collapsed, with some regions reporting a 30% reduction in exports. This weak environment causes lasting damage to large and small companies alike. Nevertheless recent signs from the emerging markets suggest that trade is starting to gather pace, with countries like China and India growing rapidly on the back of international trade. Furthermore, the biggest consumers in the world (the US) are starting to put their hands in their pockets to purchase big-ticket items such as cars and widescreen televisions. This positive upward trend in retail sales across the globe is supporting the idea that the economic recovery is stronger than first predicted.
One of the many concerns in the UK is the current level of debt facing the consumers. With a decade of easy credit and a booming housing market, the average consumer indebted themselves to greater and greater extent. This debt will reduce the disposable income of the UK public in the future and could seriously damage a recovery. However, interestingly enough the average consumer has been paying their debt and saving more than ever. To expand on this idea, with house prices seemingly on the rise again and the equities enjoying a strong 12 month rally, the average consumer is now feeling more wealthily and more willing to spend their money. The retail and service sectors are still improving and the future looks far better than was predicted during the start of the recession.
The strength of the recovery is always going to be in question and there is no doubt that the economic recovery is going to be a slow and gradual process. Yet, there are currently plenty of early signs that the recovery is taking a firm hold but it might not be the growth the west is used to.
Is China still looking like a good investment?
The economic revolution that has occurred in China over the last 20 years is nothing short of a miracle. This was built on the back of cheap labour and large natural resources and has made China the world's production house. However, in recent months, with China revaluing the Renminbi and Chinese workers demanding more money, is this the end of the economic miracle?
The Chinese authorities announced a move to a more flexible management of the Renminbi, which had been pegged against the US dollar since July 2008. China succumbed to international pressure, holding their currency at artificially low levels to give their exports an international advantage. This move may be positive for the rest of the world as it helps to use market forces to rebalance international trade. Nevertheless, it could seriously increase the value of China’s exports in international markets and subsequently reduce the demand for their products. This will reduce the profitability of many of the large Chinese companies and could slow economic growth in the country. Even so, the appreciation of the renminbi will be relatively slow due to the daily growth cap and the basket of currencies it is now pegged against. Most estimates suggest that it will take one year for the currency to rise by 3-5%.
The cheap labour that helped the Chinese economy grow so rapidly may be coming to an end as the workers rebel in search of a livable wage. There have been various high profile walkouts by Chinese workers in companies such as Toyota and Hyundai leading to staff pay rises of 30%. With growing fears of unions and worker pressure, the Chinese government is increasing the average minimum wage across nine providences in an aim to curb discontent amongst the workforce. These wage increases will no doubt reduce the overall profitability of the firms and make goods produced in China more expensive. However, by putting more money in the Chinese workers’ pockets, this allows the domestic economy to grow, as the average consumer will now be able to purchase more goods. It could actually be a very strategic idea, as the global output continues to decline, it would be better in the long run for China to have steady growth in wages to generate a domestic economy.
Overall, there are some obvious headwinds that will face the Chinese economy in the short term. In spite of that, as the domestic consumer grows and China’s internal economy expands to be the largest consumer market in the world, you would have to think that investing in such a dynamic country will be profitable in the long term. Like all investments in emerging markets we would warn you these markets are often volatile and only for the experienced investor. If you would like to gain exposure to China we currently offer a specialist fundin this sector.
The Chinese authorities announced a move to a more flexible management of the Renminbi, which had been pegged against the US dollar since July 2008. China succumbed to international pressure, holding their currency at artificially low levels to give their exports an international advantage. This move may be positive for the rest of the world as it helps to use market forces to rebalance international trade. Nevertheless, it could seriously increase the value of China’s exports in international markets and subsequently reduce the demand for their products. This will reduce the profitability of many of the large Chinese companies and could slow economic growth in the country. Even so, the appreciation of the renminbi will be relatively slow due to the daily growth cap and the basket of currencies it is now pegged against. Most estimates suggest that it will take one year for the currency to rise by 3-5%.
The cheap labour that helped the Chinese economy grow so rapidly may be coming to an end as the workers rebel in search of a livable wage. There have been various high profile walkouts by Chinese workers in companies such as Toyota and Hyundai leading to staff pay rises of 30%. With growing fears of unions and worker pressure, the Chinese government is increasing the average minimum wage across nine providences in an aim to curb discontent amongst the workforce. These wage increases will no doubt reduce the overall profitability of the firms and make goods produced in China more expensive. However, by putting more money in the Chinese workers’ pockets, this allows the domestic economy to grow, as the average consumer will now be able to purchase more goods. It could actually be a very strategic idea, as the global output continues to decline, it would be better in the long run for China to have steady growth in wages to generate a domestic economy.
Overall, there are some obvious headwinds that will face the Chinese economy in the short term. In spite of that, as the domestic consumer grows and China’s internal economy expands to be the largest consumer market in the world, you would have to think that investing in such a dynamic country will be profitable in the long term. Like all investments in emerging markets we would warn you these markets are often volatile and only for the experienced investor. If you would like to gain exposure to China we currently offer a specialist fundin this sector.
Is the US government going to stop spending?
The US economy is the largest and most influential economy in the world. The old saying “if the American economy sneezes the rest of the world catches a cold” is as true today as ever. When president Obama came into power with a landslide victory the democrats extended their majority in both the House of Representatives and the Senate (similar to House of Commons and House of Lords). With this suitable majority the Obama administration was able to successfully pass the largest ever stimulus package: the American Recovery and Reinvestment act, which pumped $787 billion into the US economy. Moreover, he managed to pass healthcare reforms and extend benefits to unemployed Americans, which in turn helped the US economy out of their deepest recession since the great depression in the 1930s.
However, in November of this year, the US populace go back to the polls to vote in the mid-term elections, in which all seats in the House and a third of the seats in the Senate are up for grabs. There is currently a large political backlash against a variety of Obama’s spending policies, especially by the conservative right in America, which could lead to a republican majority in the House of Representatives. If this occurs the American political process will be at a standstill as the republicans, who are traditionally fiscal conservatives, will be able to prevent any new spending policies by the president and the democrat government.
If the republicans manage to gain power the new spending policies by the democrats will almost certainly be blocked by the republican majority in the house. This lack of government expenditure in the economy could lead to a slow down in the economic recovery of the US and this would have a dramatic impact on the rest of the world. This is because the US consumer is the backbone of the global economy.
On the other hand, the American debt currently stands at approximately $13 trillion and the yearly budget deficit is in the region of $1.3 trillion. This has led many economists to suggest that paying down the deficit is the number one priority for the US government. This message is echoed by many of the average American’s who see the current spending by the US government as reckless, unnecessary and ineffective.
Without a doubt long-term debt reduction should be the aim of the US government; nevertheless the pure scope and depth of the recession in the US means that removing stimulus measures too soon could seriously damage the strength of the recovery.
We currently reccomend the Neptune US Opportunties fund in our Cautious, Balanced and Adventure portfolios.
However, in November of this year, the US populace go back to the polls to vote in the mid-term elections, in which all seats in the House and a third of the seats in the Senate are up for grabs. There is currently a large political backlash against a variety of Obama’s spending policies, especially by the conservative right in America, which could lead to a republican majority in the House of Representatives. If this occurs the American political process will be at a standstill as the republicans, who are traditionally fiscal conservatives, will be able to prevent any new spending policies by the president and the democrat government.
If the republicans manage to gain power the new spending policies by the democrats will almost certainly be blocked by the republican majority in the house. This lack of government expenditure in the economy could lead to a slow down in the economic recovery of the US and this would have a dramatic impact on the rest of the world. This is because the US consumer is the backbone of the global economy.
On the other hand, the American debt currently stands at approximately $13 trillion and the yearly budget deficit is in the region of $1.3 trillion. This has led many economists to suggest that paying down the deficit is the number one priority for the US government. This message is echoed by many of the average American’s who see the current spending by the US government as reckless, unnecessary and ineffective.
Without a doubt long-term debt reduction should be the aim of the US government; nevertheless the pure scope and depth of the recession in the US means that removing stimulus measures too soon could seriously damage the strength of the recovery.
We currently reccomend the Neptune US Opportunties fund in our Cautious, Balanced and Adventure portfolios.
Property investment funds
Until the banking issues and recession changed our economic outlook in 2007, the performance of property as an asset class had been robust, supported by low interest rates and the limited supply of land as well as a supportive environment. Combined with the nervousness generated by the falling share prices of 2000-2003, and again during 2008/09, these factors led to renewed focus on property as an investment for individuals as well as big corporations.
It is certain that property, like any other volatile asset, should only be considered as a long-term investment and buildings are far less liquid than stocks and shares, ie: the money being invested or looking to be withdrawn can be subject to a lengthy buy and sell process. However, it can offer certain investors real benefits within a diverse portfolio, so if you believe it is suitable for you, exposure to the market can be achieved in a number of different ways.
For the most sophisticated and wealthy investors, there is the option to invest directly in buy-to-let or commercial property (eg: offices or retail). For the average investor, however, the capital commitment and the specialist knowledge required, particularly for commercial property, are beyond their means. For much smaller lump sums, therefore, a different route might be necessary.
Option one is to buy the shares of property companies. These allow you to invest in a developer’s business and therefore gain exposure to their range of projects. This is just one step away from direct investment, but is more liquid and usually cheaper to access. However, property shares are equities and, just like the shares of Vodafone or BP, are influenced not just by property's prospects but also by wider market sentiment. Hence, the value of your investment will be volatile – much more volatile than investing in bricks and mortar direct.
Another option therefore, might be to consider a unit trust or life fund. Both offer access to a range of different investment options and their size means they buy not just one building project but many, providing diversification benefits for even a small sum.
The range of funds available is also varied - some invest 100% in bricks and mortar, while some include an exposure to property shares; some hold only UK property, while others venture overseas. Whatever your requirements, therefore, one of these options is likely to meet your needs. This does not, however, detract for the fact that property is a specialist area and professional advice should always be sought before you make a decision.
We currently reccomend the SWIP - Property trust in both our cautious and balanced portfolios.
Search Engine Marketing and SEO Tools
It is certain that property, like any other volatile asset, should only be considered as a long-term investment and buildings are far less liquid than stocks and shares, ie: the money being invested or looking to be withdrawn can be subject to a lengthy buy and sell process. However, it can offer certain investors real benefits within a diverse portfolio, so if you believe it is suitable for you, exposure to the market can be achieved in a number of different ways.
For the most sophisticated and wealthy investors, there is the option to invest directly in buy-to-let or commercial property (eg: offices or retail). For the average investor, however, the capital commitment and the specialist knowledge required, particularly for commercial property, are beyond their means. For much smaller lump sums, therefore, a different route might be necessary.
Option one is to buy the shares of property companies. These allow you to invest in a developer’s business and therefore gain exposure to their range of projects. This is just one step away from direct investment, but is more liquid and usually cheaper to access. However, property shares are equities and, just like the shares of Vodafone or BP, are influenced not just by property's prospects but also by wider market sentiment. Hence, the value of your investment will be volatile – much more volatile than investing in bricks and mortar direct.
Another option therefore, might be to consider a unit trust or life fund. Both offer access to a range of different investment options and their size means they buy not just one building project but many, providing diversification benefits for even a small sum.
The range of funds available is also varied - some invest 100% in bricks and mortar, while some include an exposure to property shares; some hold only UK property, while others venture overseas. Whatever your requirements, therefore, one of these options is likely to meet your needs. This does not, however, detract for the fact that property is a specialist area and professional advice should always be sought before you make a decision.
We currently reccomend the SWIP - Property trust in both our cautious and balanced portfolios.
Search Engine Marketing and SEO Tools
Is a strong pound desirable?
Since the onset of the “great recession” the British pound has been under pressure and against a basket of currencies and has devalued by approximately 25%. The main reasons behind the decline in the pound are the high level of public debt, our extraordinarily low interest rates, quantitative easing policies, the depth of the UK recession and the UK dependence on the financial services sector. With the new Conservative and Liberal coalition mainly focussing on the debt reduction, the pound experienced a strong rally from May till July. However, that rally appears to have fizzled out during August, especially against the US Dollar and Euro. This begs the question: “is a strong pound actually beneficial for the country?”
The main problems with a weak currency can be summarised in one word that all investors abhor: ‘inflation’. The UK is currently experiencing the longest period of above-target inflation since independence was given to the Bank of England in 1997. The fundamental reason is that the pound is currently very weak against other currencies and therefore the goods we import are more expensive. The most influential of these imported goods is oil, as it the backbone of our economy. Fuel is a major cost in production and general cost of running a business; therefore if there is a substantial rise in the cost this will be passed on to the consumers further adding to inflationary pressure. Taking this idea to an individual level; we have all noticed that when we go to petrol pumps we are getting less fuel for our money and the cost of fuel is now a higher proportion of our spending. If the UK populace is spending more on fuel there is less money to spend on other goods and services, so inevitably other sectors suffer. This is true for all imported commodities. The UK imports far exceed the amount we export, therefore generating more upward price pressure.
On the other side, a weak currency is beneficial for our export market, as UK goods will appear cheaper in foreign countries and as a result the demand for the goods increases and sales increase. This concept is called ‘export led recovery’ and this has gradually emerged in the UK over the last 6 – 9 months as export orders have increased. The weak currency also affects the consumption habits of the average consumer; for example, imported goods are now more expensive in supermarkets so people will tend to opt to buy UK manufactured goods as they are cheaper in comparison. Furthermore, people are less willing to travel abroad for their holidays as the currency exchange rate means they have less purchasing power in foreign countries. There was a 14% decline in money spent aboard by UK citizens during 2009, as people preferred a stay at home holiday.
Overall, the risk of inflation massively increasing in the UK is highly unlikely until the levels of employment start to increase and the slack in the economy is utilised. Therefore, it would be advantageous for the British Pound to remain weak, to give full support to economic growth.
The main problems with a weak currency can be summarised in one word that all investors abhor: ‘inflation’. The UK is currently experiencing the longest period of above-target inflation since independence was given to the Bank of England in 1997. The fundamental reason is that the pound is currently very weak against other currencies and therefore the goods we import are more expensive. The most influential of these imported goods is oil, as it the backbone of our economy. Fuel is a major cost in production and general cost of running a business; therefore if there is a substantial rise in the cost this will be passed on to the consumers further adding to inflationary pressure. Taking this idea to an individual level; we have all noticed that when we go to petrol pumps we are getting less fuel for our money and the cost of fuel is now a higher proportion of our spending. If the UK populace is spending more on fuel there is less money to spend on other goods and services, so inevitably other sectors suffer. This is true for all imported commodities. The UK imports far exceed the amount we export, therefore generating more upward price pressure.
On the other side, a weak currency is beneficial for our export market, as UK goods will appear cheaper in foreign countries and as a result the demand for the goods increases and sales increase. This concept is called ‘export led recovery’ and this has gradually emerged in the UK over the last 6 – 9 months as export orders have increased. The weak currency also affects the consumption habits of the average consumer; for example, imported goods are now more expensive in supermarkets so people will tend to opt to buy UK manufactured goods as they are cheaper in comparison. Furthermore, people are less willing to travel abroad for their holidays as the currency exchange rate means they have less purchasing power in foreign countries. There was a 14% decline in money spent aboard by UK citizens during 2009, as people preferred a stay at home holiday.
Overall, the risk of inflation massively increasing in the UK is highly unlikely until the levels of employment start to increase and the slack in the economy is utilised. Therefore, it would be advantageous for the British Pound to remain weak, to give full support to economic growth.
Thursday, 16 September 2010
Eurozone economy remains resilient
August saw the MSCI Europe excluding UK index decline by 2.2% in euro terms although there was a marked divergence in the performance of individual countries on the continent.
Ireland, for example, performed particularly poorly, partly because of a sharp fall in the share price of building materials company CRH Holdings. The group, which makes up more than 20% of the ISEQ index, announced disappointing interim earnings towards the end of the month.
Although European investors were buoyed by some positive economic data, looming signs of slowing economic growth from other major powers ensured that, on balance, investor sentiment deteriorated. Nevertheless, a flurry of merger and acquisition activity, including a bid for US biotech company Genzyme by French pharmaceutical group Sanofi-Aventis, provided a welcome distraction for investors.
The eurozone’s economy grew at its fastest rate in four years during the second quarter of 2010. European economic growth had gathered strength after the Greek debt debacle, boosted by promising signs of growth in the global economy. However, indications of cooling growth in China and a slowdown in US economic expansion proved detrimental to investor sentiment, which remains vulnerable to bad news from other leading economies around the world.
European inflation posted an annualised increase of 1.6% during August, having increased by 1.7% during July. Unemployment remained high as European companies continue to cut costs in order to safeguard their profits. During the month, investors became more optimistic the European Central Bank would provide support for banks in the eurozone for longer than originally expected.
In France, the government reduced its forecast for domestic economic growth in 2011from 2.5% to 2%. However, Germany achieved record economic growth during the second quarter of 2010, spurred by export activity and investment. Consumer spending in Germany registered growth of 0.6% while the Bundesbank increased its forecast for economic growth in Germany next year from 1.9% to 3%
Nevertheless, according to the ZEW Centre for European Economic Research, investor confidence in Germany fell to a 16-month low during August, suggesting investors anticipate a slowdown in the rate of economic growth as demand for the country’s exports starts to ease.
According to the European Commission, confidence in the economic prospects for the region reached its highest level for more than two years, boosted by strong export activity. Even so, European investors might find export activity starts to decelerate if overseas countries reduce spending to help cut their budget deficits.
Ireland, for example, performed particularly poorly, partly because of a sharp fall in the share price of building materials company CRH Holdings. The group, which makes up more than 20% of the ISEQ index, announced disappointing interim earnings towards the end of the month.
Although European investors were buoyed by some positive economic data, looming signs of slowing economic growth from other major powers ensured that, on balance, investor sentiment deteriorated. Nevertheless, a flurry of merger and acquisition activity, including a bid for US biotech company Genzyme by French pharmaceutical group Sanofi-Aventis, provided a welcome distraction for investors.
The eurozone’s economy grew at its fastest rate in four years during the second quarter of 2010. European economic growth had gathered strength after the Greek debt debacle, boosted by promising signs of growth in the global economy. However, indications of cooling growth in China and a slowdown in US economic expansion proved detrimental to investor sentiment, which remains vulnerable to bad news from other leading economies around the world.
European inflation posted an annualised increase of 1.6% during August, having increased by 1.7% during July. Unemployment remained high as European companies continue to cut costs in order to safeguard their profits. During the month, investors became more optimistic the European Central Bank would provide support for banks in the eurozone for longer than originally expected.
In France, the government reduced its forecast for domestic economic growth in 2011from 2.5% to 2%. However, Germany achieved record economic growth during the second quarter of 2010, spurred by export activity and investment. Consumer spending in Germany registered growth of 0.6% while the Bundesbank increased its forecast for economic growth in Germany next year from 1.9% to 3%
Nevertheless, according to the ZEW Centre for European Economic Research, investor confidence in Germany fell to a 16-month low during August, suggesting investors anticipate a slowdown in the rate of economic growth as demand for the country’s exports starts to ease.
According to the European Commission, confidence in the economic prospects for the region reached its highest level for more than two years, boosted by strong export activity. Even so, European investors might find export activity starts to decelerate if overseas countries reduce spending to help cut their budget deficits.
Demand for corporate bonds increases
Demand for low-risk assets remained strong during August amid intensifying fears the global economic recovery is losing impetus.
According to the Investment Management Association, bonds continued to outsell equities with Sterling Strategic Bond the second most popular sector during June while Sterling High Yield outperformed all other bond groupings over the previous 12 months.
Meanwhile, UK gilt prices extended their rally and yields fell as investors became more sanguine that UK interest rates would remain at their current exceptionally low levels, increasing the attraction of fixed-income securities.
The UK economy grew more quickly than expected during the second quarter of 2010. UK gross domestic product expanded by 1.2%, according to the Office for National Statistics (ONS), driven by renewed activity in the construction sector and inventory restocking by companies. However, growth in services, which make up a significant proportion of the UK economy, was revised down from 0.9% to 0.7%.
The rate of employment in the UK rose to 70.5% during the second quarter, increasing by 184,000. According to the ONS, this was the largest quarterly increase in the number of people in employment since 1989, although the rise was fuelled primarily by an increase in part-time workers.
The British Chambers of Commerce expects the Bank of England (BoE) to maintain UK interest rates at their current low level of 0.5% until the second quarter of 2011 and also suggests the planned cuts in government spending will increase the likelihood of a double-dip recession.
Meanwhile, speculation about the future path of UK interest rates remains lively, although the BoE remained tight-lipped about its plans, merely stating its rate-setting Monetary Policy Committee was “ready to respond in either direction as the balance of risks evolved”.
According to the ONS, the rate of UK inflation grew by 3.1% during July, year on year, having registered growth of 3.2% during June. Lower prices for transport, clothing and footwear caused the slight drop. BoE governor Mervyn King believes UK inflation could continue to surpass the Government’s upper limit of 3% in the short term, but expects inflation to fall below the bank’s rolling 2% target during 2012 “as persistent spare capacity weighs on companies’ costs and prices”.
In the BoE’s most recent Quarterly Inflation Report, King also warned that tight credit conditions and budget cuts are likely to hamper economic growth, sparking fresh fears the UK economy might need additional emergency stimulus.
According to the Investment Management Association, bonds continued to outsell equities with Sterling Strategic Bond the second most popular sector during June while Sterling High Yield outperformed all other bond groupings over the previous 12 months.
Meanwhile, UK gilt prices extended their rally and yields fell as investors became more sanguine that UK interest rates would remain at their current exceptionally low levels, increasing the attraction of fixed-income securities.
The UK economy grew more quickly than expected during the second quarter of 2010. UK gross domestic product expanded by 1.2%, according to the Office for National Statistics (ONS), driven by renewed activity in the construction sector and inventory restocking by companies. However, growth in services, which make up a significant proportion of the UK economy, was revised down from 0.9% to 0.7%.
The rate of employment in the UK rose to 70.5% during the second quarter, increasing by 184,000. According to the ONS, this was the largest quarterly increase in the number of people in employment since 1989, although the rise was fuelled primarily by an increase in part-time workers.
The British Chambers of Commerce expects the Bank of England (BoE) to maintain UK interest rates at their current low level of 0.5% until the second quarter of 2011 and also suggests the planned cuts in government spending will increase the likelihood of a double-dip recession.
Meanwhile, speculation about the future path of UK interest rates remains lively, although the BoE remained tight-lipped about its plans, merely stating its rate-setting Monetary Policy Committee was “ready to respond in either direction as the balance of risks evolved”.
According to the ONS, the rate of UK inflation grew by 3.1% during July, year on year, having registered growth of 3.2% during June. Lower prices for transport, clothing and footwear caused the slight drop. BoE governor Mervyn King believes UK inflation could continue to surpass the Government’s upper limit of 3% in the short term, but expects inflation to fall below the bank’s rolling 2% target during 2012 “as persistent spare capacity weighs on companies’ costs and prices”.
In the BoE’s most recent Quarterly Inflation Report, King also warned that tight credit conditions and budget cuts are likely to hamper economic growth, sparking fresh fears the UK economy might need additional emergency stimulus.
UK economy expands rapidly in the second quarter
Although the UK stockmarket ended August in negative territory, its performance over the month as a whole was significantly better than that of many other major equity markets.
Investors were encouraged by some better-than-expected economic data, which fuelled hopes of a sustained economic recovery. In particular, encouraging US consumer confidence data provided a boost for investor sentiment towards the end of the month.
The FTSE 100 index declined by 0.6% during August, although underlying performance was mixed and share prices experienced some volatility during the month. Medium-sized and smaller companies suffered more than larger companies as investors shunned higher-risk market areas in favour of blue chip securities.
The UK economy grew more quickly than expected during the second quarter of 2010 while retail sales rose by more than expected during July, boosting hopes the country’s economic recovery might be gaining strength.Meanwhile, consumer confidence posted an unexpected increase during August. Even so, despite some encouraging data, the Bank of England’s stance on the economic outlook remained relatively pessimistic, at least in the short term.
Shares in WPP, the world’s largest advertising company, tumbled during the month after the group remained uncertain about the outlook, particularly in the light of possible fiscal contagion in Europe from Greece, Spain, Portugal and Ireland.
Takeover speculation increased towards the end of the month, with names such as Cable & Wireless, Weir Group, Charter International and Tui Travel the subjects of discussion. Meanwhile shares in energy engineer Amec were boosted by strong first-half profits and the company’s dividend payout was raised by 20%.
The aftershocks from BP’s massive oil spill in the Gulf of Mexico continued to reverberate during the month and the group’s share price remained vulnerable to ongoing speculation about the extent of its liabilities. Meanwhile, the wider oil sector was not helped by the falling price of oil and UK oil explorer Dana Petroleum became the subject of a hostile takeover bid by Korea National Oil, having rejected its initial approach.
According to data released by the Investment Management Association during August, the UK All Companies sector experienced positive net retail sales during June, whereas the UK Smaller Companies sector suffered net redemptions and was one of the least popular groupings during the month. The UK Smaller Companies sector did perform significantly better than its UK All Companies counterpart on a one-month basis, although both groupings generated negative returns.
Investors were encouraged by some better-than-expected economic data, which fuelled hopes of a sustained economic recovery. In particular, encouraging US consumer confidence data provided a boost for investor sentiment towards the end of the month.
The FTSE 100 index declined by 0.6% during August, although underlying performance was mixed and share prices experienced some volatility during the month. Medium-sized and smaller companies suffered more than larger companies as investors shunned higher-risk market areas in favour of blue chip securities.
The UK economy grew more quickly than expected during the second quarter of 2010 while retail sales rose by more than expected during July, boosting hopes the country’s economic recovery might be gaining strength.Meanwhile, consumer confidence posted an unexpected increase during August. Even so, despite some encouraging data, the Bank of England’s stance on the economic outlook remained relatively pessimistic, at least in the short term.
Shares in WPP, the world’s largest advertising company, tumbled during the month after the group remained uncertain about the outlook, particularly in the light of possible fiscal contagion in Europe from Greece, Spain, Portugal and Ireland.
Takeover speculation increased towards the end of the month, with names such as Cable & Wireless, Weir Group, Charter International and Tui Travel the subjects of discussion. Meanwhile shares in energy engineer Amec were boosted by strong first-half profits and the company’s dividend payout was raised by 20%.
The aftershocks from BP’s massive oil spill in the Gulf of Mexico continued to reverberate during the month and the group’s share price remained vulnerable to ongoing speculation about the extent of its liabilities. Meanwhile, the wider oil sector was not helped by the falling price of oil and UK oil explorer Dana Petroleum became the subject of a hostile takeover bid by Korea National Oil, having rejected its initial approach.
According to data released by the Investment Management Association during August, the UK All Companies sector experienced positive net retail sales during June, whereas the UK Smaller Companies sector suffered net redemptions and was one of the least popular groupings during the month. The UK Smaller Companies sector did perform significantly better than its UK All Companies counterpart on a one-month basis, although both groupings generated negative returns.
Wednesday, 15 September 2010
US economy remains sluggish
US share prices endured a torrid month as a raft of disappointing data threatened to derail the country’s economic recovery.
During August, the S&P 500 index registered a decline of 4.7% and smaller companies were particularly badly hit as investors avoided riskier assets in favour of the perceived safety of government bonds, gold and US dollars.
In a high-profile speech at Jackson Hole, Wyoming, US Federal Reserve chairman Ben Bernanke pledged that the central bank would “do all that it can” to support the country’s economic recovery, and that the Fed is prepared to “provide additional monetary accommodation through unconventional measures” if necessary. The Fed announced a fresh programme of asset purchases during the month in order to support the economic recovery and reduce borrowing costs.
Bernanke warned that economic growth had been too slow and unemployment was too high. According to the Labor Department, US jobless claims reached their highest level since November, stoking concerns the economic recovery might be faltering. The US economy expanded by 1.6%, year on year, during the second quarter of 2010 after growing by 3.7% in the first quarter. The deceleration was caused by slower inventory growth and an expanding trade gap. The trade deficit widened unexpectedly during June as imports increased and exports dropped
At the corporate level, chipmaker Intel reduced its forecast for third-quarter revenue, blaming slower demand for personal computers in mature markets. In this regard, Bernanke noted “investment in equipment and software will almost certainly increase more slowly over the remainder of this year.”
During the month, US motor manufacturer General Motors announced a massive initial public offering (IPO) that will allow the company to start repaying the state funds that were used to stave off bankruptcy in the summer of 2009. The US government holds a 61% stake in the company that the IPO will help to reduce.
US retail sales increased during July by less than expected and the Commerce Department reported a slower-than-expected rise in personal income that did nothing to allay concerns about the strength of the US economic recovery.
On a brighter note, US consumer spending registered unexpectedly robust growth during July. During August, retailers Wal Mart and Home Depot increased their full-year profits forecasts. Meanwhile, the Conference Board’s index of consumer confidence rose to 53.5% during August after falling to a five-month low of 51 during July. The news provided a much-needed boost for investor sentiment at the end of the month
During August, the S&P 500 index registered a decline of 4.7% and smaller companies were particularly badly hit as investors avoided riskier assets in favour of the perceived safety of government bonds, gold and US dollars.
In a high-profile speech at Jackson Hole, Wyoming, US Federal Reserve chairman Ben Bernanke pledged that the central bank would “do all that it can” to support the country’s economic recovery, and that the Fed is prepared to “provide additional monetary accommodation through unconventional measures” if necessary. The Fed announced a fresh programme of asset purchases during the month in order to support the economic recovery and reduce borrowing costs.
Bernanke warned that economic growth had been too slow and unemployment was too high. According to the Labor Department, US jobless claims reached their highest level since November, stoking concerns the economic recovery might be faltering. The US economy expanded by 1.6%, year on year, during the second quarter of 2010 after growing by 3.7% in the first quarter. The deceleration was caused by slower inventory growth and an expanding trade gap. The trade deficit widened unexpectedly during June as imports increased and exports dropped
At the corporate level, chipmaker Intel reduced its forecast for third-quarter revenue, blaming slower demand for personal computers in mature markets. In this regard, Bernanke noted “investment in equipment and software will almost certainly increase more slowly over the remainder of this year.”
During the month, US motor manufacturer General Motors announced a massive initial public offering (IPO) that will allow the company to start repaying the state funds that were used to stave off bankruptcy in the summer of 2009. The US government holds a 61% stake in the company that the IPO will help to reduce.
US retail sales increased during July by less than expected and the Commerce Department reported a slower-than-expected rise in personal income that did nothing to allay concerns about the strength of the US economic recovery.
On a brighter note, US consumer spending registered unexpectedly robust growth during July. During August, retailers Wal Mart and Home Depot increased their full-year profits forecasts. Meanwhile, the Conference Board’s index of consumer confidence rose to 53.5% during August after falling to a five-month low of 51 during July. The news provided a much-needed boost for investor sentiment at the end of the month
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