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.
Thursday, 16 September 2010
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
Emerging markets endure a choppy August
Amid mounting concerns the global economic recovery is under pressure, while a spate of disappointing economic data from the US affected investor sentiment around the world.
The MSCI Emerging Markets index declined by 2.2% in US dollar terms during the month, while the BRIC nations (Brazil, Russia, India and China) fell by an aggregated 3%. Eastern European equity markets fell by 3.9%, while Latin America and Asia declined by 2.5% and 1.7% respectively.
China’s stockmarket ended the month largely unchanged after posting strong gains during July. The country also overtook Japan during the second quarter of 2010 to become the world’s second-largest economy, reflecting its growing power and influence in the global economic arena.
Nevertheless, China’s rapid economic growth is starting to decelerate following measures to avert the risk of overheating, spurring speculation the government might decide to reduce curbs on lending. Export orders also began to show signs of slowing, suggesting international demand for the country’s products might be cooling. Meanwhile, China’s inflation rate reached its highest level for 21 months during July, triggering hopes inflation might have peaked. Prices were stoked by higher food costs that were inflated by the effects of flooding.
India’s economy registered its strongest growth in more than two years during the second quarter, expanding by 8.8%, year on year. Despite an uneven August, the country’s Sensex index ended the month roughly where it began. During the month, investors in India were cheered by the news lower food prices were helping to cool inflationary pressures, and by hopes of strong harvests that would provide support for economic growth. However, sentiment was held in check by worries sustained strength in economic growth might spur India’s central bank to continue raising interest rates in order to keep inflation under control.
The Russian equity market declined by 2.2% during the month and the country’s central bank maintained interest rates at 7.75%. Inflation is running high in Russia, fuelling concerns monetary policy alone will not be sufficient to control inflationary pressures in a country that has been badly affected by drought.
Brazil’s equity market declined by 3.5% during August, pulled down by concerns over the outlook for the global economic recovery and, in turn, by a fall in commodity prices. Meanwhile, the country’s rate of inflation continued to slow after interest rates were raised to 10.75% ahead of presidential elections in October.
The MSCI Emerging Markets index declined by 2.2% in US dollar terms during the month, while the BRIC nations (Brazil, Russia, India and China) fell by an aggregated 3%. Eastern European equity markets fell by 3.9%, while Latin America and Asia declined by 2.5% and 1.7% respectively.
China’s stockmarket ended the month largely unchanged after posting strong gains during July. The country also overtook Japan during the second quarter of 2010 to become the world’s second-largest economy, reflecting its growing power and influence in the global economic arena.
Nevertheless, China’s rapid economic growth is starting to decelerate following measures to avert the risk of overheating, spurring speculation the government might decide to reduce curbs on lending. Export orders also began to show signs of slowing, suggesting international demand for the country’s products might be cooling. Meanwhile, China’s inflation rate reached its highest level for 21 months during July, triggering hopes inflation might have peaked. Prices were stoked by higher food costs that were inflated by the effects of flooding.
India’s economy registered its strongest growth in more than two years during the second quarter, expanding by 8.8%, year on year. Despite an uneven August, the country’s Sensex index ended the month roughly where it began. During the month, investors in India were cheered by the news lower food prices were helping to cool inflationary pressures, and by hopes of strong harvests that would provide support for economic growth. However, sentiment was held in check by worries sustained strength in economic growth might spur India’s central bank to continue raising interest rates in order to keep inflation under control.
The Russian equity market declined by 2.2% during the month and the country’s central bank maintained interest rates at 7.75%. Inflation is running high in Russia, fuelling concerns monetary policy alone will not be sufficient to control inflationary pressures in a country that has been badly affected by drought.
Brazil’s equity market declined by 3.5% during August, pulled down by concerns over the outlook for the global economic recovery and, in turn, by a fall in commodity prices. Meanwhile, the country’s rate of inflation continued to slow after interest rates were raised to 10.75% ahead of presidential elections in October.
Japanese economy remains fragile
Fresh concerns about the outlook for Japan’s economy and prospects for the wider global economy affected Japanese share prices during August, and the Nikkei 225 Stock Average index fell by 7.5% over the month as a whole.
Growth stocks fared particularly badly and, according to the Investment Management Association, investors continued to avoid Japanese equity funds – particularly those with a bias towards smaller companies, which are viewed as relatively high risk
.Conditions appear to be deteriorating in Japan, where the economy barely grew during the second quarter, expanding by just 0.4% year on year, according to the country’s Cabinet Office. Weak consumer spending, slowing export growth and the effects of a strong yen have all taken their toll and this growth was significantly lower than many analysts had expected.
The Bank of Japan increased its monetary stimulus as the yen hit 15-year highs during the month. Concerns about the strength of the global economic recovery spurred risk-averse investors to seek the perceived “safe havens” of currencies such as the yen – as well as the Swiss franc and the US dollar. Meanwhile, the Ministry of Finance confirmed that nervous Japanese institutional investors had bought the largest amount of foreign bonds in August for any time since 2001.
China superseded Japan to become the world’s second-largest economy during the second quarter of 2010. According to the Cabinet Office, Japan’s gross domestic product for the second quarter amounted to $1.29 trillion (£837bn), compared with growth of $1.34 trillion in China. Japanese Prime Minister Naoto Kan consequently warned that the country’s economy needs to be “closely monitored”.
Deflation continues to be a massive challenge for policymakers in Japan. Consumer prices continued on their downward trajectory during July. Although household spending registered growth of 1.1%, according to the Statistics Bureau, this growth was lower than expected. Meanwhile, machinery orders posted slower-than-expected growth during June, suggesting that many companies are delaying their spending plans.
Towards the end of August, share prices in Japan received a welcome boost from the news that US Federal Reserve Chairman Ben Bernanke was committed to supporting the US economic recovery. Investors were also buoyed by hopes that Japan’s government would not allow the yen’s appreciation to continue unchecked. Japan’s economic growth relies heavily on export activity and, as such, the ongoing strength of the domestic currency poses a real threat to the country’s economic growth.
Growth stocks fared particularly badly and, according to the Investment Management Association, investors continued to avoid Japanese equity funds – particularly those with a bias towards smaller companies, which are viewed as relatively high risk
.Conditions appear to be deteriorating in Japan, where the economy barely grew during the second quarter, expanding by just 0.4% year on year, according to the country’s Cabinet Office. Weak consumer spending, slowing export growth and the effects of a strong yen have all taken their toll and this growth was significantly lower than many analysts had expected.
The Bank of Japan increased its monetary stimulus as the yen hit 15-year highs during the month. Concerns about the strength of the global economic recovery spurred risk-averse investors to seek the perceived “safe havens” of currencies such as the yen – as well as the Swiss franc and the US dollar. Meanwhile, the Ministry of Finance confirmed that nervous Japanese institutional investors had bought the largest amount of foreign bonds in August for any time since 2001.
China superseded Japan to become the world’s second-largest economy during the second quarter of 2010. According to the Cabinet Office, Japan’s gross domestic product for the second quarter amounted to $1.29 trillion (£837bn), compared with growth of $1.34 trillion in China. Japanese Prime Minister Naoto Kan consequently warned that the country’s economy needs to be “closely monitored”.
Deflation continues to be a massive challenge for policymakers in Japan. Consumer prices continued on their downward trajectory during July. Although household spending registered growth of 1.1%, according to the Statistics Bureau, this growth was lower than expected. Meanwhile, machinery orders posted slower-than-expected growth during June, suggesting that many companies are delaying their spending plans.
Towards the end of August, share prices in Japan received a welcome boost from the news that US Federal Reserve Chairman Ben Bernanke was committed to supporting the US economic recovery. Investors were also buoyed by hopes that Japan’s government would not allow the yen’s appreciation to continue unchecked. Japan’s economic growth relies heavily on export activity and, as such, the ongoing strength of the domestic currency poses a real threat to the country’s economic growth.
UK companies reduce dividends
Dividend payouts from UK companies are now expected to fall by 6.5% during 2010, according to research undertaken by Capita Registrars and published during August. This decline results from companies cutting or cancelling dividends in order to prop up their balance sheets and ride out the recession.
BP has been a major factor in this drop after it suspended its dividend following the disastrous oil spill in the Gulf of Mexico. The group has estimated the leak has so far cost it more than $6bn (£3.9bn) and has confirmed that more than 30,000 people are now working on the response to the leak. Almost five billion barrels of oil are believed to have leaked into the Gulf of Mexico after the Deepwater Horizon rig explosion in April. The leak was finally stopped last month although the full financial and environmental impacts remain, as yet, unknown.
During the first six months of 2010, UK companies paid almost 10% less in dividends to shareholders than in the same period of 2008 with the banking sector – unsurprisingly – a major contributor to this drop. Household goods and property companies also found themselves under pressure as the recession took hold.
At the other end of the spectrum, however, many companies in defensive sectors such as tobacco and pharmaceuticals, which tend to be more resilient during times of economic decline, found themselves able to increase their payouts.
Nevertheless, amid signs some managements are becoming more sanguine about the outlook for their companies’ profitability and the strength of their balance sheets, some UK companies have reinstated their dividends or increased payouts to their shareholders.
In particular, the UK’s largest insurance group, Prudential, announced higher-than-expected first-half profits during August and raised its interim dividend by 5%. Services company Serco increased its payout by 18.9%, while Admiral Insurance raised its dividend by 1%. Energy engineer Amec increased its dividend by 20% and WPP, the world’s largest advertising company, boosted its payout by 15%.
According to data released during August by the Investment Management Association, UK Equity Income & Growth was the 13th-best selling sector during June. The UK Equity Income grouping, into which the UK Equity Income & Growth sector has since remerged, also experienced positive net retail sales.
At the end of the month, the UK equity market yielded approximately 3.3%, compared with a yield of approximately 2.8% on the benchmark 10-year UK government bond, strengthening the attractions of UK equity income for investors searching for yield.
BP has been a major factor in this drop after it suspended its dividend following the disastrous oil spill in the Gulf of Mexico. The group has estimated the leak has so far cost it more than $6bn (£3.9bn) and has confirmed that more than 30,000 people are now working on the response to the leak. Almost five billion barrels of oil are believed to have leaked into the Gulf of Mexico after the Deepwater Horizon rig explosion in April. The leak was finally stopped last month although the full financial and environmental impacts remain, as yet, unknown.
During the first six months of 2010, UK companies paid almost 10% less in dividends to shareholders than in the same period of 2008 with the banking sector – unsurprisingly – a major contributor to this drop. Household goods and property companies also found themselves under pressure as the recession took hold.
At the other end of the spectrum, however, many companies in defensive sectors such as tobacco and pharmaceuticals, which tend to be more resilient during times of economic decline, found themselves able to increase their payouts.
Nevertheless, amid signs some managements are becoming more sanguine about the outlook for their companies’ profitability and the strength of their balance sheets, some UK companies have reinstated their dividends or increased payouts to their shareholders.
In particular, the UK’s largest insurance group, Prudential, announced higher-than-expected first-half profits during August and raised its interim dividend by 5%. Services company Serco increased its payout by 18.9%, while Admiral Insurance raised its dividend by 1%. Energy engineer Amec increased its dividend by 20% and WPP, the world’s largest advertising company, boosted its payout by 15%.
According to data released during August by the Investment Management Association, UK Equity Income & Growth was the 13th-best selling sector during June. The UK Equity Income grouping, into which the UK Equity Income & Growth sector has since remerged, also experienced positive net retail sales.
At the end of the month, the UK equity market yielded approximately 3.3%, compared with a yield of approximately 2.8% on the benchmark 10-year UK government bond, strengthening the attractions of UK equity income for investors searching for yield.
Postive corporate news boosts European markets
This year, no news is better news for the eurozone and July was a quieter month for the region. Moodys’ downgrade of Portuguese debt was widely expected and the rating agency kept the country well above junk status at A1, down from AA2.
The International Monetary Fund also kept its prediction of growth for the eurozone as a whole unchanged at 1%, although it did suggest the greatest risks to the global economic recovery were still posed by the weaker eurozone countries.
There were even some pockets of good news. The Irish Republic finally left recession, with growth in the second quarter rising by 2.7%. Eurozone manufacturing and service data came in better than expected, with the performance of both sectors in Germany particularly strong. This suggested resilience in private consumption, which was cheering for economists and implied GDP growth in the third quarter of 0.7% from 0.5% in the second quarter. Industrial output also improved over the month, rising 0.9%. However, the results showed a marked difference between core and peripheral Europe with Germany and France strong and Spain and Portugal still contracting.
The stress tests carried out on Europe’s banks were not disruptive, even though many considered them insufficiently robust to be informative. Seven banks failed out of 91 – none of them surprises and most of them in Spain. There remain some concerns about the European banks’ willingness to lend to each other, which the stress tests did little to rectify.
Corporate news was generally good, with surveys suggesting a marked improvement in companies’ confidence. A raft of companies beat analysts’ forecasts for the second quarter, including behemoths Siemens, Volkswagen, BASF, Telefonica, Repsol and Royal Dutch Shell. Industrial companies have led the way and this was one in the eye to those who suggested the recent strength in the eurozone was all down to the World Cup. The weak euro is undoubtedly benefiting some of the manufacturing groups, particularly in Germany.
The FTSE Eurofirst index was up 4.9% for the month, behind the US and UK, but ahead of Asia. The weaker countries saw stronger stockmarket performance as investors re-embraced risk. For example, the Spanish Ibex index rose 16% in July, while the German Dax rose just 4.5% and the French CAC rose 9%. European funds have a long way to catch up, however, and remain the only equity sector in negative territory this year. The Europe excluding UK grouping has fallen 5.22% over the year to date.
The International Monetary Fund also kept its prediction of growth for the eurozone as a whole unchanged at 1%, although it did suggest the greatest risks to the global economic recovery were still posed by the weaker eurozone countries.
There were even some pockets of good news. The Irish Republic finally left recession, with growth in the second quarter rising by 2.7%. Eurozone manufacturing and service data came in better than expected, with the performance of both sectors in Germany particularly strong. This suggested resilience in private consumption, which was cheering for economists and implied GDP growth in the third quarter of 0.7% from 0.5% in the second quarter. Industrial output also improved over the month, rising 0.9%. However, the results showed a marked difference between core and peripheral Europe with Germany and France strong and Spain and Portugal still contracting.
The stress tests carried out on Europe’s banks were not disruptive, even though many considered them insufficiently robust to be informative. Seven banks failed out of 91 – none of them surprises and most of them in Spain. There remain some concerns about the European banks’ willingness to lend to each other, which the stress tests did little to rectify.
Corporate news was generally good, with surveys suggesting a marked improvement in companies’ confidence. A raft of companies beat analysts’ forecasts for the second quarter, including behemoths Siemens, Volkswagen, BASF, Telefonica, Repsol and Royal Dutch Shell. Industrial companies have led the way and this was one in the eye to those who suggested the recent strength in the eurozone was all down to the World Cup. The weak euro is undoubtedly benefiting some of the manufacturing groups, particularly in Germany.
The FTSE Eurofirst index was up 4.9% for the month, behind the US and UK, but ahead of Asia. The weaker countries saw stronger stockmarket performance as investors re-embraced risk. For example, the Spanish Ibex index rose 16% in July, while the German Dax rose just 4.5% and the French CAC rose 9%. European funds have a long way to catch up, however, and remain the only equity sector in negative territory this year. The Europe excluding UK grouping has fallen 5.22% over the year to date.
Growth in emerging markets stalling
It was a measure of the pace of growth in China that markets were troubled when it ‘only’ posted GDP growth of 10.3% for the three months to the end of June.
This was down from 11.9% in the first quarter, but well above the government’s 8% target. The slowdown was a reflection of the fading stimulus as last year’s surge in government-sponsored bank lending abated. The International Monetary Fund (IMF) raised its growth forecasts to 10.5% for the full year 2010 and 9.6% for 2011.
However, there were a few more worrying signs. Industrial production rose just 13.7% in June against expectations of 15.4%. CPI inflation came in lower than expected at 2.9% for June from 3.1% for May, both of which suggested a – welcome or otherwise – slowdown in the pace of growth.
India was forced to hike interest rates 0.25% to 5.5% as inflation hit 10.2%. Food price inflation continued to be particularly troublesome. The IMF dropped its 2010 forecast for the country, down 0.6% to 9.4%. Industrial output growth slowed to 7.17% in June from 11.3% in May, raising the question as to whether Indian companies were spending, or simply shoring up their businesses.
In Brazil, finance minister Guido Mantega said the country would grow 0.5% to 1% in the second quarter of 2010. He added that this was a slowdown from the first quarter but represented a more sustainable level of growth without risking inflation.
Russia was one of the few countries to see an acceleration in growth in the second quarter, with GDP rising at an annualised 5.2%. This was partly a reflection of the rising oil price – up from $74.65 (£47.87) to $77.42 a barrel over the month. However, growth forecasts were hit by a destructive heatwave and estimates suggest as much as 1% may be shaved off growth as agricultural output was hit.
It was a strong month for emerging economy equities, with all markets except India enjoying double-digit returns. India’s S&P CNX 500 index could only manage an anaemic 1.9% as investors fretted about its growth prospects and inflationary pressures. However, the FTSE Xinhua index was up 11.4%, the Russian RTS index was up 10.5% and Brazil’s Bovespa index was up 10.8%.
Emerging markets funds remain among the best performers over the year to date. The average fund is up 4.5% since the start of the year with the best-performing fund up 13.4%. More defensively positioned funds have suffered, however, and the worst-performing fund is down 4.4%.
This was down from 11.9% in the first quarter, but well above the government’s 8% target. The slowdown was a reflection of the fading stimulus as last year’s surge in government-sponsored bank lending abated. The International Monetary Fund (IMF) raised its growth forecasts to 10.5% for the full year 2010 and 9.6% for 2011.
However, there were a few more worrying signs. Industrial production rose just 13.7% in June against expectations of 15.4%. CPI inflation came in lower than expected at 2.9% for June from 3.1% for May, both of which suggested a – welcome or otherwise – slowdown in the pace of growth.
India was forced to hike interest rates 0.25% to 5.5% as inflation hit 10.2%. Food price inflation continued to be particularly troublesome. The IMF dropped its 2010 forecast for the country, down 0.6% to 9.4%. Industrial output growth slowed to 7.17% in June from 11.3% in May, raising the question as to whether Indian companies were spending, or simply shoring up their businesses.
In Brazil, finance minister Guido Mantega said the country would grow 0.5% to 1% in the second quarter of 2010. He added that this was a slowdown from the first quarter but represented a more sustainable level of growth without risking inflation.
Russia was one of the few countries to see an acceleration in growth in the second quarter, with GDP rising at an annualised 5.2%. This was partly a reflection of the rising oil price – up from $74.65 (£47.87) to $77.42 a barrel over the month. However, growth forecasts were hit by a destructive heatwave and estimates suggest as much as 1% may be shaved off growth as agricultural output was hit.
It was a strong month for emerging economy equities, with all markets except India enjoying double-digit returns. India’s S&P CNX 500 index could only manage an anaemic 1.9% as investors fretted about its growth prospects and inflationary pressures. However, the FTSE Xinhua index was up 11.4%, the Russian RTS index was up 10.5% and Brazil’s Bovespa index was up 10.8%.
Emerging markets funds remain among the best performers over the year to date. The average fund is up 4.5% since the start of the year with the best-performing fund up 13.4%. More defensively positioned funds have suffered, however, and the worst-performing fund is down 4.4%.
US economy looks uncertain
Far from being the engine of global growth, in economic terms the US could do nothing right in July. The month started with policymakers gathering to issue dire warnings about the state of the economy.
US Treasury Secretary Timothy Geithner said the world should no longer rely on the US to drive global growth, while Federal Reserve chairman Ben Bernanke suggested the outlook was “unusually uncertain”. Even former Federal Reserve chairman Alan Greenspan weighed in, saying the US risked a double-dip.
Meanwhile the weak economic data came thick and fast, culminating at the end of the month in disappointing GDP growth figures. The US reported annualised growth of just 2.4% in the second quarter of 2010, against expectations of 2.6%. This was largely driven by weakness in consumption growth, which fell to 1.6% from 1.9%.
Economists are suggesting the US could be in real trouble if jobs growth does not start to come through soon. The economy shed 130,000 jobs in July against an estimate of 65,000 and companies – despite their relative strong financial position – are still disinclined to spend.
Elsewhere, new home sales remain sluggish. Consumer prices are still falling – June’s 0.1% drop representing a slowdown from the fall of 0.2% in May – with energy prices the biggest contributor. Retail sales were weak, down 0.5% in June, with falls in the prices of petrol, cars and building materials, though again this was a marginally slower decline than in May. The service sector continued to grow, but at its slowest pace since February.
The Federal Government was also forced to open its overstretched wallet one again, this time to bail out cash-strapped US states. California, for example, has declared a financial state of emergency and the US House of Representatives has now passed an aid package of $26bn (£16.7bn).
Companies have been offering the respite from the gloom and this has been crucial in providing support to markets. Second-quarter earnings have been promising, with many large groups coming in ahead of expectations. The S&P 500 index rose 6.9% over the month, which of the major markets was only topped by the FTSE 100.
The North American Smaller Companies sector remains the second best performing equity sector over the year to date – after the UK Smaller Companies grouping – with the average fund up 5.37%. However, the main North American sector has not fared so well, with the average fund up just 1.45% over 2010. In this time, the top fund has returned 12.4% while bottom fund is down 15.6%.
US Treasury Secretary Timothy Geithner said the world should no longer rely on the US to drive global growth, while Federal Reserve chairman Ben Bernanke suggested the outlook was “unusually uncertain”. Even former Federal Reserve chairman Alan Greenspan weighed in, saying the US risked a double-dip.
Meanwhile the weak economic data came thick and fast, culminating at the end of the month in disappointing GDP growth figures. The US reported annualised growth of just 2.4% in the second quarter of 2010, against expectations of 2.6%. This was largely driven by weakness in consumption growth, which fell to 1.6% from 1.9%.
Economists are suggesting the US could be in real trouble if jobs growth does not start to come through soon. The economy shed 130,000 jobs in July against an estimate of 65,000 and companies – despite their relative strong financial position – are still disinclined to spend.
Elsewhere, new home sales remain sluggish. Consumer prices are still falling – June’s 0.1% drop representing a slowdown from the fall of 0.2% in May – with energy prices the biggest contributor. Retail sales were weak, down 0.5% in June, with falls in the prices of petrol, cars and building materials, though again this was a marginally slower decline than in May. The service sector continued to grow, but at its slowest pace since February.
The Federal Government was also forced to open its overstretched wallet one again, this time to bail out cash-strapped US states. California, for example, has declared a financial state of emergency and the US House of Representatives has now passed an aid package of $26bn (£16.7bn).
Companies have been offering the respite from the gloom and this has been crucial in providing support to markets. Second-quarter earnings have been promising, with many large groups coming in ahead of expectations. The S&P 500 index rose 6.9% over the month, which of the major markets was only topped by the FTSE 100.
The North American Smaller Companies sector remains the second best performing equity sector over the year to date – after the UK Smaller Companies grouping – with the average fund up 5.37%. However, the main North American sector has not fared so well, with the average fund up just 1.45% over 2010. In this time, the top fund has returned 12.4% while bottom fund is down 15.6%.
Strong month for UK equities
The UK market was the best-performing developed market in July and, within that, UK growth stocks saw the strongest gains. The FTSE 350 Low Yield index delivered 10.7% against a return from its higher-yielding counterpart of 7.9%
.The FTSE 100 index of leading stocks rose 9.4% over the month, outstripping developed markets such as the US, where the S&P 500 rose 6.89%, and Europe, whose FTSE Eurofirst index was up 4.92%. In Japan, the Nikkei was significantly weaker.
There was a slow drip of good news from the UK economy. GDP growth hit 1.1% from April to June, which was significantly ahead of analysts’ expectations of a 0.6% rise and the fastest quarterly expansion since 2006. This represented a promising pick-up from the first three months of the year when the economy expanded just 0.3%. The construction sector showed particular strength.
In contrast to the US, unemployment figures were also better than expected – raising hopes that the private sector may yet be able to take some of the slack from public sector job cuts. UK manufacturing output showed the strongest growth in 15 years.
The news was not all one way, however. Public sector borrowing came in higher than expected. Equally, at the start of the month, the International Monetary Fund dropped its growth forecast for the UK citing the austerity measures in the Emergency Budget.
Nevertheless, markets were happy enough with the economic news and more than happy with many of the corporate results during the month. The insurers, notably Aviva and Prudential, posted results ahead of expectations and many of the banks returned to profit.
The biggest problems now facing the UK are external. The weakness in the US is a potential headache as its economic data continues to disappoint. Economic growth fell short of expectations, coming in at just 2.4% for April to June. Housing statistics and jobless figures also weakened. As a reflection of this, sterling hit a six-month high against the dollar towards the end of the month. There also remain continued worries about the strength of Asian growth although the eurozone keeps defying expectations and may yet offset the weakness in the US.
The average fund in the UK All Companies sector is still ahead of the UK Equity Income sector over the year to date, having returned 4.49% against 3.95%. However, the showing of the UK All Companies sector has been skewed by the punchy performance of a number of aggressive growth funds. The top fund in the sector has returned 36.9% so far in 2012 while the top fund in the UK Equity Income sector has returned just 16.4%.
.The FTSE 100 index of leading stocks rose 9.4% over the month, outstripping developed markets such as the US, where the S&P 500 rose 6.89%, and Europe, whose FTSE Eurofirst index was up 4.92%. In Japan, the Nikkei was significantly weaker.
There was a slow drip of good news from the UK economy. GDP growth hit 1.1% from April to June, which was significantly ahead of analysts’ expectations of a 0.6% rise and the fastest quarterly expansion since 2006. This represented a promising pick-up from the first three months of the year when the economy expanded just 0.3%. The construction sector showed particular strength.
In contrast to the US, unemployment figures were also better than expected – raising hopes that the private sector may yet be able to take some of the slack from public sector job cuts. UK manufacturing output showed the strongest growth in 15 years.
The news was not all one way, however. Public sector borrowing came in higher than expected. Equally, at the start of the month, the International Monetary Fund dropped its growth forecast for the UK citing the austerity measures in the Emergency Budget.
Nevertheless, markets were happy enough with the economic news and more than happy with many of the corporate results during the month. The insurers, notably Aviva and Prudential, posted results ahead of expectations and many of the banks returned to profit.
The biggest problems now facing the UK are external. The weakness in the US is a potential headache as its economic data continues to disappoint. Economic growth fell short of expectations, coming in at just 2.4% for April to June. Housing statistics and jobless figures also weakened. As a reflection of this, sterling hit a six-month high against the dollar towards the end of the month. There also remain continued worries about the strength of Asian growth although the eurozone keeps defying expectations and may yet offset the weakness in the US.
The average fund in the UK All Companies sector is still ahead of the UK Equity Income sector over the year to date, having returned 4.49% against 3.95%. However, the showing of the UK All Companies sector has been skewed by the punchy performance of a number of aggressive growth funds. The top fund in the sector has returned 36.9% so far in 2012 while the top fund in the UK Equity Income sector has returned just 16.4%.
Friday, 16 July 2010
Income funds suffer as BP cancels dividend
Equity income was uppermost in many investors’ and advisers’ minds during June with newsflow during the month dominated by speculation – and, eventually, confirmation – that troubled oil giant BP would cancel its dividend.
BP has been under pressure since the middle of April. Following an explosion at an offshore rig in the Gulf of Mexico, in which 11 people died, oil has been leaking into the ocean, and the cost to the company – not only in monetary terms, but also reputationally – continues to rise.
BP has cancelled its dividend payment for the next three quarters and announced it intends to sell oil and gas fields and reduce investment in drilling. The company has agreed to set up a $20bn (£13bn) fund to fund compensation claims filed by those affected by the oil spill, although BP’s actual liabilities are, as yet, unknown. President Obama warned that the fund would not cap BP’s liability for the costs of the cleanup, or supersede individuals’ or states’ entitlements to launch their own legal action against the company.
Before the news of the dividend cancellation, BP led the FTSE 100 companies in dividend payments. According to Capita Registrars, the top five UK companies for dividend payments – headed by BP – paid 56% of the FTSE 100 index’s total yield during the first three months of 2010. Some equity income fund managers are now wondering how to maintain their own funds’ dividend payments.
Many funds that hold BP are index-tracking portfolios that have no option but to own the stock. Even individuals without direct exposure to BP might be indirectly exposed through their pension fund or through a collective investment scheme. For its part, the National Association of Pension Funds estimates UK pension funds’ exposure to BP is only about 1.5% of their total assets, but remained cautious on the longer-term prospects for the company.
Although BP’s decision to cancel its dividend has created something of a headache for equity income fund managers, investors should not forget that the UK equity market includes many other sizeable companies with strong balance sheets that should help to plug the gap.
Looking further ahead, although BP’s future remains cloudy, and the costs of the oil leak continue to mount, it is worth remembering that many companies that cut or cancelled dividend payments during the torrid times of the credit crisis – most notably the major banks – have now resumed their payouts.
BP has been under pressure since the middle of April. Following an explosion at an offshore rig in the Gulf of Mexico, in which 11 people died, oil has been leaking into the ocean, and the cost to the company – not only in monetary terms, but also reputationally – continues to rise.
BP has cancelled its dividend payment for the next three quarters and announced it intends to sell oil and gas fields and reduce investment in drilling. The company has agreed to set up a $20bn (£13bn) fund to fund compensation claims filed by those affected by the oil spill, although BP’s actual liabilities are, as yet, unknown. President Obama warned that the fund would not cap BP’s liability for the costs of the cleanup, or supersede individuals’ or states’ entitlements to launch their own legal action against the company.
Before the news of the dividend cancellation, BP led the FTSE 100 companies in dividend payments. According to Capita Registrars, the top five UK companies for dividend payments – headed by BP – paid 56% of the FTSE 100 index’s total yield during the first three months of 2010. Some equity income fund managers are now wondering how to maintain their own funds’ dividend payments.
Many funds that hold BP are index-tracking portfolios that have no option but to own the stock. Even individuals without direct exposure to BP might be indirectly exposed through their pension fund or through a collective investment scheme. For its part, the National Association of Pension Funds estimates UK pension funds’ exposure to BP is only about 1.5% of their total assets, but remained cautious on the longer-term prospects for the company.
Although BP’s decision to cancel its dividend has created something of a headache for equity income fund managers, investors should not forget that the UK equity market includes many other sizeable companies with strong balance sheets that should help to plug the gap.
Looking further ahead, although BP’s future remains cloudy, and the costs of the oil leak continue to mount, it is worth remembering that many companies that cut or cancelled dividend payments during the torrid times of the credit crisis – most notably the major banks – have now resumed their payouts.
Emerging Markets continue to decline on world recovery doubts
June saw a sharp rise in risk aversion as investors became increasingly preoccupied about the strength and sustainability of the economic recovery, and share prices in emerging markets were not immune from these nerves.
Nevertheless, towards the end of the month, a positive reaction from G20 leaders about plans to cut deficits within developed economies provided a boost in demand for shares in emerging markets.
Lower commodity prices placed share prices in Brazil under pressure, while speculation that Spain’s credit rating was under review compounded investors’ nerves. Brazil’s central bank does expect the country’s economy to expand by 7.3% this year, boosted by domestic demand, but it also warned that the debt crisis in Europe is likely to continue to exert further pressure.
The International Monetary Fund warned that Russia might have to allow its currency to appreciate in order to put a brake on inflation and that the government should start to withdraw its fiscal stimulus. Russian interest rates remained unchanged at 7.75% during June as inflationary pressures ease and the pace of the economic recovery picks up. Meanwhile in India, finance minister Pranab Mukherjee said the country’s economy could expand by more than 8.5% this year and by 9% next year
Share prices in China fell towards the end of the month amid concerns that expectations for economic growth in the country might be tempered by worries over the debt crisis in the eurozone and tighter policy. The People’s Bank of China believes that the country’s economy is likely to “maintain steady and rapid growth” during 2010, but warned that the backdrop, both internal and overseas, remains complicated.
The Chinese authorities also announced their intention to make the exchange rate more flexible, although China’s central bank does not intend to instigate an immediate revaluation of the yuan. China is now widely expected to dilute or abandon the two-year peg of the yuan to the US dollar, and might look instead to peg the yuan to a basket of currencies that provide a more accurate reflection of China’s principal export markets. However, the possibility of a stronger yuan triggered some concerns of slower economic growth and a drop in export activity.
In its annual report, the Bank for International Settlements warned that emerging economies might have to increase interest rates and allow their currencies to appreciate in order to avoid the inflationary pressures and the formation of asset bubbles
Nevertheless, towards the end of the month, a positive reaction from G20 leaders about plans to cut deficits within developed economies provided a boost in demand for shares in emerging markets.
Lower commodity prices placed share prices in Brazil under pressure, while speculation that Spain’s credit rating was under review compounded investors’ nerves. Brazil’s central bank does expect the country’s economy to expand by 7.3% this year, boosted by domestic demand, but it also warned that the debt crisis in Europe is likely to continue to exert further pressure.
The International Monetary Fund warned that Russia might have to allow its currency to appreciate in order to put a brake on inflation and that the government should start to withdraw its fiscal stimulus. Russian interest rates remained unchanged at 7.75% during June as inflationary pressures ease and the pace of the economic recovery picks up. Meanwhile in India, finance minister Pranab Mukherjee said the country’s economy could expand by more than 8.5% this year and by 9% next year
Share prices in China fell towards the end of the month amid concerns that expectations for economic growth in the country might be tempered by worries over the debt crisis in the eurozone and tighter policy. The People’s Bank of China believes that the country’s economy is likely to “maintain steady and rapid growth” during 2010, but warned that the backdrop, both internal and overseas, remains complicated.
The Chinese authorities also announced their intention to make the exchange rate more flexible, although China’s central bank does not intend to instigate an immediate revaluation of the yuan. China is now widely expected to dilute or abandon the two-year peg of the yuan to the US dollar, and might look instead to peg the yuan to a basket of currencies that provide a more accurate reflection of China’s principal export markets. However, the possibility of a stronger yuan triggered some concerns of slower economic growth and a drop in export activity.
In its annual report, the Bank for International Settlements warned that emerging economies might have to increase interest rates and allow their currencies to appreciate in order to avoid the inflationary pressures and the formation of asset bubbles
Recovery jitters lead investors to fixed-interest assets
Disappointing economic data from the US boosted demand for fixed-income assets during June, after a May in which net retail sales of bond funds dropped sharply to reach their lowest level since August 2008.
The UK government raised £8bn from the sale of a 4.25% gilt with a 30-year maturity. The sale took place through banks and was the biggest syndicated gilt offering by the UK Debt Management Office (DMO) to date. The DMO’s chief executive commented that the sale’s success “reflects well on the continued strength and attractiveness of the gilt market”.
Sterling and government bonds also received a boost following the coalition government’s Emergency Budget, which provided some encouragement that the government is working to bring down the UK’s substantial budget deficit. However, the Government’s planned programme of spending cuts and tax increases is expected by many to hamper the UK’s economic recovery. Ongoing concerns about the outlook for the eurozone’s economy provided further support for sterling against the euro. The pound also strengthened against the US dollar towards the end of the month as G20 leaders backed the UK’s plans to cut its budget deficit.
June saw the Bank of England (BoE) maintain interest rates at an all-time low of 0.5 for a sixteenth consecutive month; however, one member of the central bank’s interest-rate-setting committee broke ranks to vote in favour of an increase in rates. This helped to fuel expectations of higher interest rates later in the year, providing fresh impetus for the pound. The BoE’s favoured measure of money supply (M4) saw strong growth, indicating the central banks’ programme of quantitative easing measures is having an effect.
In his inaugural Mansion House speech, Chancellor of the Exchequer George Osborne announced sweeping changes to the regulation of the UK financial sector. He intends to scrap the present structure of financial regulation and hand responsibility for regulating the UK’s financial sector to the BoE.
The UK Gilts sector was the best-performing IMA sector during May. The only IMA sectors to achieve positive returns during the month were the Global Bond sector, the UK Index-Linked Gilts sector and the UK Gilts sector. The Sterling Strategic Bond sector was the fourth most popular sector among retail investors, but proved the least popular sector for institutional investors during the month. Looking back, the Sterling Corporate Bond sector proved the most popular sector for both retail and institutional investors during 2009 as a whole.
The UK government raised £8bn from the sale of a 4.25% gilt with a 30-year maturity. The sale took place through banks and was the biggest syndicated gilt offering by the UK Debt Management Office (DMO) to date. The DMO’s chief executive commented that the sale’s success “reflects well on the continued strength and attractiveness of the gilt market”.
Sterling and government bonds also received a boost following the coalition government’s Emergency Budget, which provided some encouragement that the government is working to bring down the UK’s substantial budget deficit. However, the Government’s planned programme of spending cuts and tax increases is expected by many to hamper the UK’s economic recovery. Ongoing concerns about the outlook for the eurozone’s economy provided further support for sterling against the euro. The pound also strengthened against the US dollar towards the end of the month as G20 leaders backed the UK’s plans to cut its budget deficit.
June saw the Bank of England (BoE) maintain interest rates at an all-time low of 0.5 for a sixteenth consecutive month; however, one member of the central bank’s interest-rate-setting committee broke ranks to vote in favour of an increase in rates. This helped to fuel expectations of higher interest rates later in the year, providing fresh impetus for the pound. The BoE’s favoured measure of money supply (M4) saw strong growth, indicating the central banks’ programme of quantitative easing measures is having an effect.
In his inaugural Mansion House speech, Chancellor of the Exchequer George Osborne announced sweeping changes to the regulation of the UK financial sector. He intends to scrap the present structure of financial regulation and hand responsibility for regulating the UK’s financial sector to the BoE.
The UK Gilts sector was the best-performing IMA sector during May. The only IMA sectors to achieve positive returns during the month were the Global Bond sector, the UK Index-Linked Gilts sector and the UK Gilts sector. The Sterling Strategic Bond sector was the fourth most popular sector among retail investors, but proved the least popular sector for institutional investors during the month. Looking back, the Sterling Corporate Bond sector proved the most popular sector for both retail and institutional investors during 2009 as a whole.
An eventful month for UK equity investors
In a month largely dominated by negative newsflow – ranging from concerns over the sustainability of the economic recovery and the long-term effects of Chancellor of the Exchequer George Osborne’s planned spending cuts.
To the continued fallout from BP’s catastrophic oil leak in the Gulf of Mexico – investors’ appetite for risk dwindled and share prices fell. Over the second quarter of 2010 as a whole, the FTSE 100 index declined by 13.4%.During the month, the Chancellor announced a series of controversial spending cuts and tax rises in the coalition government’s emergency Budget, aimed at bringing down the UK’s massive budget deficit. Measures included an increase in VAT from 17.5% to 20% from January 2011, and increased capital gains tax for higher-rate taxpayers.
Most government departments will undergo substantial real budget cuts, while various benefits are to be cut, capped or frozen. Meanwhile, the Government is to introduce a bank levy – on UK banks, building societies and the UK-based operations of international banks – that is expected to raise £2bn per year. Reaction to the measures was mixed with some critics protesting the spending cuts could trigger a “double-dip” recession.
The share price of beleaguered oil company BP proved particularly volatile during the month. Since an offshore rig exploded in the Gulf of Mexico during April, BP’s share price has fallen by more than half. Nevertheless, the company’s share price experienced some sporadic upward movement during June amid speculation that BP might become a target for a predator. However, some analysts believe the prospect of a takeover bid remains unlikely while BP’s liabilities remain unquantifiable. Under intense pressure from the US government, BP announced the cancellation of its dividend for the next three quarters.
UK retail sales registered stronger-than-expected growth during June, boosted by strong demand for televisions to watch the football World Cup. However, consumer confidence continued to fall while UK inflation dropped more quickly than expected during May, held back by lower food prices and slower price growth for petrol and alcohol.
Food retailer Tesco reported stagnant quarterly sales growth as the company struggled with lower food prices. Management blamed high fuel prices that left consumers with less money to spend elsewhere. Nevertheless, US investment guru Warren Buffett has continued to add to his holdings in Tesco and now owns more than 3% of the company through his Berkshire Hathaway investment company.
To the continued fallout from BP’s catastrophic oil leak in the Gulf of Mexico – investors’ appetite for risk dwindled and share prices fell. Over the second quarter of 2010 as a whole, the FTSE 100 index declined by 13.4%.During the month, the Chancellor announced a series of controversial spending cuts and tax rises in the coalition government’s emergency Budget, aimed at bringing down the UK’s massive budget deficit. Measures included an increase in VAT from 17.5% to 20% from January 2011, and increased capital gains tax for higher-rate taxpayers.
Most government departments will undergo substantial real budget cuts, while various benefits are to be cut, capped or frozen. Meanwhile, the Government is to introduce a bank levy – on UK banks, building societies and the UK-based operations of international banks – that is expected to raise £2bn per year. Reaction to the measures was mixed with some critics protesting the spending cuts could trigger a “double-dip” recession.
The share price of beleaguered oil company BP proved particularly volatile during the month. Since an offshore rig exploded in the Gulf of Mexico during April, BP’s share price has fallen by more than half. Nevertheless, the company’s share price experienced some sporadic upward movement during June amid speculation that BP might become a target for a predator. However, some analysts believe the prospect of a takeover bid remains unlikely while BP’s liabilities remain unquantifiable. Under intense pressure from the US government, BP announced the cancellation of its dividend for the next three quarters.
UK retail sales registered stronger-than-expected growth during June, boosted by strong demand for televisions to watch the football World Cup. However, consumer confidence continued to fall while UK inflation dropped more quickly than expected during May, held back by lower food prices and slower price growth for petrol and alcohol.
Food retailer Tesco reported stagnant quarterly sales growth as the company struggled with lower food prices. Management blamed high fuel prices that left consumers with less money to spend elsewhere. Nevertheless, US investment guru Warren Buffett has continued to add to his holdings in Tesco and now owns more than 3% of the company through his Berkshire Hathaway investment company.
European markets concerned about sovereign debt
European markets endured another challenging month as worries about some countries’ indebtedness continued unabated, accompanied by widespread concerns that stringent austerity measures imposed by governments might hold back economic recovery.
Investors’ concerns over prospects for recovery were compounded by fears of another credit crunch, as Europe’s debt crisis has made the region’s banks increasingly reluctant to lend to one another. “Stress tests” on the region’s banks have been performed and will be published in due course.
Although the criteria for the tests are currently unknown, the decision to publish was welcomed by shareholders. Nevertheless, some banks complained that, unless the region’s governments pledge financial assistance to weaker institutions, publication of the tests’ results might ultimately damage confidence in the banks.
The end of the month saw sharp falls in share prices and the value of the euro amid concerns banks might not be able to repay hundreds of billions in emergency loans to the European Central Bank (ECB) by a 1 July deadline. Nevertheless, as June ended, the ECB announced it would lend a lower-than-expected amount to the banks, and this news cheered investors, as it suggested the eurozone’s financial sector might be in better shape than previously thought.
The euro endured a torrid month amid ongoing concerns over possible defaults by some highly indebted countries within the eurozone. Nevertheless, the weak euro is making the region’s exports more attractive to countries outside the region. According to the EU’s statistics office, exports in the eurozone rose by 2.5% during the first three months of 2010, compared with growth of 1.7% in the previous quarter.
That said, it is worth remembering that Germany, the eurozone’s largest economy, relies heavily on demand from its fellow eurozone members for its exports. Indeed, investor confidence plummeted in Germany during June as investors became increasingly worried that the European debt crisis would hamper growth in exports and the German economy.
The ECB maintained interest rates in the eurozone at 1% during June, and the bank’s president Jean-Claude Trichet warned that growth would be “uneven”. Lower government spending and higher taxes in the region are likely to avert any risk of excessive inflationary pressure, allowing the ECB to retain its relatively loose monetary stance.
Demand for European equities during the month was low while Europe excluding UK was one of the worst-selling IMA sectors in terms of net retail sales – surpassed only by Asia Pacific excluding Japan.
Investors’ concerns over prospects for recovery were compounded by fears of another credit crunch, as Europe’s debt crisis has made the region’s banks increasingly reluctant to lend to one another. “Stress tests” on the region’s banks have been performed and will be published in due course.
Although the criteria for the tests are currently unknown, the decision to publish was welcomed by shareholders. Nevertheless, some banks complained that, unless the region’s governments pledge financial assistance to weaker institutions, publication of the tests’ results might ultimately damage confidence in the banks.
The end of the month saw sharp falls in share prices and the value of the euro amid concerns banks might not be able to repay hundreds of billions in emergency loans to the European Central Bank (ECB) by a 1 July deadline. Nevertheless, as June ended, the ECB announced it would lend a lower-than-expected amount to the banks, and this news cheered investors, as it suggested the eurozone’s financial sector might be in better shape than previously thought.
The euro endured a torrid month amid ongoing concerns over possible defaults by some highly indebted countries within the eurozone. Nevertheless, the weak euro is making the region’s exports more attractive to countries outside the region. According to the EU’s statistics office, exports in the eurozone rose by 2.5% during the first three months of 2010, compared with growth of 1.7% in the previous quarter.
That said, it is worth remembering that Germany, the eurozone’s largest economy, relies heavily on demand from its fellow eurozone members for its exports. Indeed, investor confidence plummeted in Germany during June as investors became increasingly worried that the European debt crisis would hamper growth in exports and the German economy.
The ECB maintained interest rates in the eurozone at 1% during June, and the bank’s president Jean-Claude Trichet warned that growth would be “uneven”. Lower government spending and higher taxes in the region are likely to avert any risk of excessive inflationary pressure, allowing the ECB to retain its relatively loose monetary stance.
Demand for European equities during the month was low while Europe excluding UK was one of the worst-selling IMA sectors in terms of net retail sales – surpassed only by Asia Pacific excluding Japan.
Japanese market hit by economic uncertainty
In common with many other major equity markets, Japanese share prices ended June firmly in negative territory as concerns over the prospects for the global economic recovery continued.
The Nikkei 225 Average index fell by 4% over June, the third consecutive month in which the benchmark index had declined. Unexpectedly disappointing consumer confidence and unemployment figures from the US weighed on share prices in Japan – and across the world – amid renewed concerns over whether the US economic recovery is capable of being sustained.
These concerns eroded investors’ confidence, leading them to avoid relatively risky assets. Towards the end of the month, trading volumes dwindled as investors awaited the results of the important quarterly Tankan survey of corporate sentiment, which was due for release at the beginning of July.
A survey conducted by the Ministry of Finance and the Cabinet Office’s Economic and Social Research Institute showed that large Japanese manufacturers have become more optimistic about prospects for the business environment. However, towards the end of the month, the strong yen led the share prices of exporting companies to fall.
During the month, Japan’s new prime minister Naoto Kan cautioned that Japan was at risk of “fiscal collapse” if the problems of mounting public debt continue to be neglected. Nevertheless, despite prospects of a programme of measures aimed at reducing public debt, investors did not appear to be excessively disheartened by his warning.
Economic growth expanded during the first quarter of 2010 by a larger-than-expected 5%, year on year. Meanwhile, consumer confidence reached its highest level since October 2007 during May as individuals became more optimistic about the outlook for employment.
Retail sales in Japan grew at their slowest rate since January during May as the effects of fiscal measures to prop up the economy began to diminish. Prices remained on a downward trajectory, falling for a fifteenth consecutive month during May. Minutes from the Bank of Japan’s May meeting showed monetary policy committee members voted unanimously to hold interest rates at 0.1%.
Over the second quarter of 2010 as a whole, the Nikkei 225 posted a drop of more than 15% – Japan’s worst quarterly performance since late 2008, following the collapse of Lehman Brothers. According to data from the Investment Management Association (IMA), Japanese equity funds were out of favour with investors during May, and both Japan and Japan Smaller Companies figured among the worst-performing IMA sectors during that month.
The Nikkei 225 Average index fell by 4% over June, the third consecutive month in which the benchmark index had declined. Unexpectedly disappointing consumer confidence and unemployment figures from the US weighed on share prices in Japan – and across the world – amid renewed concerns over whether the US economic recovery is capable of being sustained.
These concerns eroded investors’ confidence, leading them to avoid relatively risky assets. Towards the end of the month, trading volumes dwindled as investors awaited the results of the important quarterly Tankan survey of corporate sentiment, which was due for release at the beginning of July.
A survey conducted by the Ministry of Finance and the Cabinet Office’s Economic and Social Research Institute showed that large Japanese manufacturers have become more optimistic about prospects for the business environment. However, towards the end of the month, the strong yen led the share prices of exporting companies to fall.
During the month, Japan’s new prime minister Naoto Kan cautioned that Japan was at risk of “fiscal collapse” if the problems of mounting public debt continue to be neglected. Nevertheless, despite prospects of a programme of measures aimed at reducing public debt, investors did not appear to be excessively disheartened by his warning.
Economic growth expanded during the first quarter of 2010 by a larger-than-expected 5%, year on year. Meanwhile, consumer confidence reached its highest level since October 2007 during May as individuals became more optimistic about the outlook for employment.
Retail sales in Japan grew at their slowest rate since January during May as the effects of fiscal measures to prop up the economy began to diminish. Prices remained on a downward trajectory, falling for a fifteenth consecutive month during May. Minutes from the Bank of Japan’s May meeting showed monetary policy committee members voted unanimously to hold interest rates at 0.1%.
Over the second quarter of 2010 as a whole, the Nikkei 225 posted a drop of more than 15% – Japan’s worst quarterly performance since late 2008, following the collapse of Lehman Brothers. According to data from the Investment Management Association (IMA), Japanese equity funds were out of favour with investors during May, and both Japan and Japan Smaller Companies figured among the worst-performing IMA sectors during that month.
US markets decline on Eurozone debt fears
US equity markets began to wobble during May amid concerns Greece might default on the payment of its debts and this sentiment went on to fuel fears other highly indebted countries might find themselves in a similar situation.
Congress put the finishing touches to the most sweeping reform of US financial regulation since the Great Depression of the 1930s. Measures include rigorous limits on banks’ scope to take excessively speculative bets on financial markets, and the creation of a consumer financial protection bureau.
Europe’s debt crisis continues to affect investor sentiment amid fears lower economic growth there might stifle demand for US exports. Meanwhile, closer to home, investors are concerned that state government budget cuts might hamper the US economic recovery.
According to a report by the National Governors Association and the National Association of State Budget Officers, US state governments intend to reduce general expenditure by 6.8% during 2010. The US economy expanded at 2.7% year on year during the first quarter of 2010 – a slower rate than previous estimates of 3% growth.
The unemployment rate fell to 9.5% during June, according to the Labor Department. The US Federal Reserve said the labour market is “improving gradually”, but that consumer spending “remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit”. The Fed went on to warn that bank lending has continued to contract over recent months. Consumer confidence is low and high levels of unemployment have hampered growth in consumer spending.
Wages grew by 0.4% during May, according to the Commerce Department – indeed, wage growth is outstripping consumer spending, which grew by 0.2% during the month. This imbalance should help the population to save money while still spending to support the domestic recovery, particularly as interest rates remain at an extremely low level. Inflation rose by 2% in May on an annualised basis
The manufacturing sector received positive news during the month, as the Institute for Supply Management-Chicago announced its business barometer fell to 59.1 during June. A number over 50 represents growth in the manufacturing sector.
The S&P 500 index registered a decline of 11.9% over the second quarter of 2010, and 7.8% over the first half of the year. North America was the fifth-best-selling IMA sector during May for retail investors, but was one of the worst-performing sectors during the month – although smaller companies slightly outperformed the broad US equity market.
Congress put the finishing touches to the most sweeping reform of US financial regulation since the Great Depression of the 1930s. Measures include rigorous limits on banks’ scope to take excessively speculative bets on financial markets, and the creation of a consumer financial protection bureau.
Europe’s debt crisis continues to affect investor sentiment amid fears lower economic growth there might stifle demand for US exports. Meanwhile, closer to home, investors are concerned that state government budget cuts might hamper the US economic recovery.
According to a report by the National Governors Association and the National Association of State Budget Officers, US state governments intend to reduce general expenditure by 6.8% during 2010. The US economy expanded at 2.7% year on year during the first quarter of 2010 – a slower rate than previous estimates of 3% growth.
The unemployment rate fell to 9.5% during June, according to the Labor Department. The US Federal Reserve said the labour market is “improving gradually”, but that consumer spending “remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit”. The Fed went on to warn that bank lending has continued to contract over recent months. Consumer confidence is low and high levels of unemployment have hampered growth in consumer spending.
Wages grew by 0.4% during May, according to the Commerce Department – indeed, wage growth is outstripping consumer spending, which grew by 0.2% during the month. This imbalance should help the population to save money while still spending to support the domestic recovery, particularly as interest rates remain at an extremely low level. Inflation rose by 2% in May on an annualised basis
The manufacturing sector received positive news during the month, as the Institute for Supply Management-Chicago announced its business barometer fell to 59.1 during June. A number over 50 represents growth in the manufacturing sector.
The S&P 500 index registered a decline of 11.9% over the second quarter of 2010, and 7.8% over the first half of the year. North America was the fifth-best-selling IMA sector during May for retail investors, but was one of the worst-performing sectors during the month – although smaller companies slightly outperformed the broad US equity market.
Will the emergency budget support growth
When George Osborne was photographed with Gladstone’s famous red briefcase, few would have envisaged that the new chancellor would deliver the most radical budget in a generation.
The conservative-liberal coalition had two factors to consider on how to slash Britain’s enormous public debt in such a way not to jeopardise the delicate economic recovery. Will this emergency budget stifle the recovery or help Britain prosper in the future?
Before the election, the Conservatives promised to have an emergency budget within 50 days, in an attempt to bring the UK’s spiralling deficit under control. George Osborne’s budget strategy was to cut spending by 77% and raise taxes by 23%, as he believes that this ratio will best support future economic growth. The main headline of this budget is a substantial increase of 2.5% in VAT to be implemented on the 4th of January 2011. On a personal level it is expected to cost the average UK household £500 a year as the general cost of living will rise. However, it is dependant on how much of the tax is absorbed by the businesses compared with the amount that will be passed on to the consumer. Nevertheless, this tax is likely to hurt businesses and consumers alike but unfortunately due to the regressive nature of the tax it affects the lowest earners disproportionately. On the positive side for the government, it is expected that the rise in VAT will raise £13 billion during the parliament and will make some serious steps in plugging the dangerous hole in the country's finances.
Since the formation of the government it has been anticipated that capital gains tax would rise for the high earners but by how much was the key question. For individuals, the rate of CGT remains at 18%, where their net taxable gains and taxable income are less than the income tax basic rate limit, currently £37,400. The 28% rate applies to gains or parts of gains that exceed that limit. Many experts are suggesting that 250,000 people will be liable for this increase in taxation and it is expected to raise almost a billion in revenue over the term of the government. This will especially hit the middle class buy to let owners, who might find themselves with a large tax bill when they choose to sell their second home.
In the run up to the election the Liberal Democrats were campaigning to increase the personal tax free allowance from £6475 to £10,000, with the view of eliminating income tax for the lowest earners in the economy. With the formation of the coalition government and in the name of compromise, George Osborne raised the threshold by £1000, which lifted 880,000 above the income tax threshold, giving basic rate tax earners an additional £170 a year in their pocket. This focused reduction will definitely benefit the lower earners in society and help to offset the rise in VAT. Furthermore, the additional money will be spent directly in the economy as lower earners spend a higher proportion of their income than the middle and higher classes. Moreover, the raising of the threshold acts as an incentive to low-income earners as they are more rewarded for their work and more willing to work supplementary hours.
The conservative government have been a consistent advocate of the importance of the free market forces and aim to provide a low tax environment that businesses require to grow. With this in mind they have laid out a 5-year plan to reduce the corporation tax by 1% each year. By reducing the tax burden on businesses this will increase profitability of the firms, which the government is hoping will spur entrepreneurialism. Furthermore, by 2015, the UK will have the lowest rate of corporation tax within the G7, which will make the UK economy a prime location for multinational companies to operate in. With this in mind, Mr Osborne raised the limit for entrepreneur’s discounted rate of taxation to £5 million in an effort to make business owners more willing to expand their businesses.
George Osborne described his first budget as ‘the unavoidable Budget’ designed to reduce the long-term debt the UK faces. In this budget he lays down plans for some of the biggest cuts in public spending since the end of World War 2. He planned to shave £6.2 billion off spending this year and left the door open for further cuts in the future. These cuts include a reduction in child tax credits, a public sector pay freeze, housing benefits and the abolishment of various new spending programmes launched by the previous government. However, these cuts in public spending will have a negative effect on the rate of economic growth in the country, as government spending is a key component in gross domestic product (GDP - a measurement of production of the whole economy). This idea is echoed by the newly-formed Office for Budget Responsibility (OBR), which has downgraded the economic growth projections in light of the new budget from 2.6% to 2.3% over 2011 -2012. Furthermore, the OBR predicts that the new budget will be worse for jobs over the next five years, as the heavy cuts in public services will lead to redundancies across the public sector workforce.
Overall, this budget has improved investors’ confidence in the country’s ability to repay its debt, with the rating agency suggesting that the UK will continue to maintain its prized triple A rating. Only time will tell whether or not the George Osborne’s first budget will successfully lead the UK economy out of recession.
The conservative-liberal coalition had two factors to consider on how to slash Britain’s enormous public debt in such a way not to jeopardise the delicate economic recovery. Will this emergency budget stifle the recovery or help Britain prosper in the future?
Before the election, the Conservatives promised to have an emergency budget within 50 days, in an attempt to bring the UK’s spiralling deficit under control. George Osborne’s budget strategy was to cut spending by 77% and raise taxes by 23%, as he believes that this ratio will best support future economic growth. The main headline of this budget is a substantial increase of 2.5% in VAT to be implemented on the 4th of January 2011. On a personal level it is expected to cost the average UK household £500 a year as the general cost of living will rise. However, it is dependant on how much of the tax is absorbed by the businesses compared with the amount that will be passed on to the consumer. Nevertheless, this tax is likely to hurt businesses and consumers alike but unfortunately due to the regressive nature of the tax it affects the lowest earners disproportionately. On the positive side for the government, it is expected that the rise in VAT will raise £13 billion during the parliament and will make some serious steps in plugging the dangerous hole in the country's finances.
Since the formation of the government it has been anticipated that capital gains tax would rise for the high earners but by how much was the key question. For individuals, the rate of CGT remains at 18%, where their net taxable gains and taxable income are less than the income tax basic rate limit, currently £37,400. The 28% rate applies to gains or parts of gains that exceed that limit. Many experts are suggesting that 250,000 people will be liable for this increase in taxation and it is expected to raise almost a billion in revenue over the term of the government. This will especially hit the middle class buy to let owners, who might find themselves with a large tax bill when they choose to sell their second home.
In the run up to the election the Liberal Democrats were campaigning to increase the personal tax free allowance from £6475 to £10,000, with the view of eliminating income tax for the lowest earners in the economy. With the formation of the coalition government and in the name of compromise, George Osborne raised the threshold by £1000, which lifted 880,000 above the income tax threshold, giving basic rate tax earners an additional £170 a year in their pocket. This focused reduction will definitely benefit the lower earners in society and help to offset the rise in VAT. Furthermore, the additional money will be spent directly in the economy as lower earners spend a higher proportion of their income than the middle and higher classes. Moreover, the raising of the threshold acts as an incentive to low-income earners as they are more rewarded for their work and more willing to work supplementary hours.
The conservative government have been a consistent advocate of the importance of the free market forces and aim to provide a low tax environment that businesses require to grow. With this in mind they have laid out a 5-year plan to reduce the corporation tax by 1% each year. By reducing the tax burden on businesses this will increase profitability of the firms, which the government is hoping will spur entrepreneurialism. Furthermore, by 2015, the UK will have the lowest rate of corporation tax within the G7, which will make the UK economy a prime location for multinational companies to operate in. With this in mind, Mr Osborne raised the limit for entrepreneur’s discounted rate of taxation to £5 million in an effort to make business owners more willing to expand their businesses.
George Osborne described his first budget as ‘the unavoidable Budget’ designed to reduce the long-term debt the UK faces. In this budget he lays down plans for some of the biggest cuts in public spending since the end of World War 2. He planned to shave £6.2 billion off spending this year and left the door open for further cuts in the future. These cuts include a reduction in child tax credits, a public sector pay freeze, housing benefits and the abolishment of various new spending programmes launched by the previous government. However, these cuts in public spending will have a negative effect on the rate of economic growth in the country, as government spending is a key component in gross domestic product (GDP - a measurement of production of the whole economy). This idea is echoed by the newly-formed Office for Budget Responsibility (OBR), which has downgraded the economic growth projections in light of the new budget from 2.6% to 2.3% over 2011 -2012. Furthermore, the OBR predicts that the new budget will be worse for jobs over the next five years, as the heavy cuts in public services will lead to redundancies across the public sector workforce.
Overall, this budget has improved investors’ confidence in the country’s ability to repay its debt, with the rating agency suggesting that the UK will continue to maintain its prized triple A rating. Only time will tell whether or not the George Osborne’s first budget will successfully lead the UK economy out of recession.
Oil Spill affects UK income funds
The UK Equity Income sector had started to look as if it had put the troubles of the past two years behind it.
At the beginning of May, it was comfortably ahead of the UK All Companies grouping for the year to date as investors had sought out defensives in an increasingly uncertain economic climate. However, that all changed in May with the BP disaster.The FTSE 350 High Yield index dropped 7.6% for the month, compared to a fall of 5.8% in the FTSE Low Yield index. Much of this drop could be attributed to BP, the largest dividend payer in the FTSE 100, which tumbled 10% over the month. Its failure to stem the oil spill in the Gulf of Mexico has analysts fearing for its survival as an independent business.
For many equity income managers, BP is a key holding in their portfolio and its problems represent a significant blow. Adviser group BestInvest has calculated that up to 40% of equity income funds have BP as their largest holding. Some, such as Neil Woodford at Invesco Perpetual, had already sold out based on weakness in the oil price, but these are the exceptions. BP has pledged to retain its dividend, which currently makes up around 15% of the overall yield on the Footsie, but if the situation in the Gulf of Mexico deteriorates further, it may find its hand forced.
May was also a tumultuous month for another big dividend provider – Prudential. Its planned AIA deal was scuppered by shareholders who did not like the price it was paying for the assets and feared capital adequacy requirements from the FSA would hamper its ability to pay a dividend. As it was, the company spent almost as much on professional fees surrounding the failed merger than it did on its dividend last year. Its shares have rallied since the deal was called off, but are still flat on the start of May.
Elsewhere, BT pleased markets by committing itself to a “progressive” dividend policy over the next three years. Storage group Big Yellow also surprised by resuming its dividend on the back of a stronger outlook while engineering group Aveva doubled its final payout.
The weakness in BP pushed the UK Equity Income sector below that of the UK All Companies grouping for 2010. The average equity income fund has now dropped 2.72% over the year to date, compared to a fall in the average UK All Companies fund of 2.21% and in the average UK Equity Income & Growth fund of 2.62%.
At the beginning of May, it was comfortably ahead of the UK All Companies grouping for the year to date as investors had sought out defensives in an increasingly uncertain economic climate. However, that all changed in May with the BP disaster.The FTSE 350 High Yield index dropped 7.6% for the month, compared to a fall of 5.8% in the FTSE Low Yield index. Much of this drop could be attributed to BP, the largest dividend payer in the FTSE 100, which tumbled 10% over the month. Its failure to stem the oil spill in the Gulf of Mexico has analysts fearing for its survival as an independent business.
For many equity income managers, BP is a key holding in their portfolio and its problems represent a significant blow. Adviser group BestInvest has calculated that up to 40% of equity income funds have BP as their largest holding. Some, such as Neil Woodford at Invesco Perpetual, had already sold out based on weakness in the oil price, but these are the exceptions. BP has pledged to retain its dividend, which currently makes up around 15% of the overall yield on the Footsie, but if the situation in the Gulf of Mexico deteriorates further, it may find its hand forced.
May was also a tumultuous month for another big dividend provider – Prudential. Its planned AIA deal was scuppered by shareholders who did not like the price it was paying for the assets and feared capital adequacy requirements from the FSA would hamper its ability to pay a dividend. As it was, the company spent almost as much on professional fees surrounding the failed merger than it did on its dividend last year. Its shares have rallied since the deal was called off, but are still flat on the start of May.
Elsewhere, BT pleased markets by committing itself to a “progressive” dividend policy over the next three years. Storage group Big Yellow also surprised by resuming its dividend on the back of a stronger outlook while engineering group Aveva doubled its final payout.
The weakness in BP pushed the UK Equity Income sector below that of the UK All Companies grouping for 2010. The average equity income fund has now dropped 2.72% over the year to date, compared to a fall in the average UK All Companies fund of 2.21% and in the average UK Equity Income & Growth fund of 2.62%.
Emerging markets fall on European debt crisis
Emerging markets suffered in May as risk aversion became the order of the day for investors.
The eurozone crisis proved more important than a raft of positive economic data coming out of the BRIC economies, though the markets were also hit by increasingly onerous government measures to tackle excessive growth. Overall, the MSCI Emerging Markets index was down 6.7% in May, putting it in line with the FTSE 100 (down 6.6%) and just ahead of the S&P 500 (down 8.4%). Eastern Europe was the worst-performing region, with the MSCI Emerging Europe index down 8.4% over the month after a particularly weak showing from the Hungarian markets. The MSCI Latin America, Asia, and Far East indices all fell in line – down 6.73%, 6.81% and 7.18% respectively over the month.
The Chinese market had its weakest month since September 2009 after the Chinese cabinet approved a plan to reform the country’s property tax regime. Property companies are well-represented in the Chinese index and had already been hurt by government measures to bring in higher down-payments and mortgage rates.
Nevertheless, the wider Chinese economy is still growing at speed, with the latest GDP figures showing a rise of 11.9%. The country is also spreading its largesse – Taiwan saw its fastest growth in 30 years, primarily on the back of surging computer chip and display panels to China. It enjoyed GDP growth of 13.3% in the three months to 31 March 2010 and a 62% rise in exports to China in April.
India also saw strong GDP growth – up 8.6% for the three months to 31 March 2010. This was in line with estimates, but raised fears of interest rate rises as the country’s benchmark inflation is around three times that of China. However, the eurozone represents around one-fifth of exports, so this may dampen inflationary pressures. The S&P CNX index was one of the month’s best-performing, down just 2.8%.
Russia finally emerged from the doldrums. Its economy expanded for the first time since 2008 in the first quarter, rising 2.9%. This was lower than expectations, but nonetheless an important turnaround. It is being helped by the sustained strength in the oil price and the government’s $100bn (£68bn) stimulus. However, the Russian RTS index had a dismal month, falling 11.9%.
Brazil is showing signs of above-expectation growth with lending on the increase and construction costs rising and indeed the OECD raised its growth forecasts for the country during the month. The country raised rates in May and is likely to raise them again in June when first quarter GDP data is revealed.
The eurozone crisis proved more important than a raft of positive economic data coming out of the BRIC economies, though the markets were also hit by increasingly onerous government measures to tackle excessive growth. Overall, the MSCI Emerging Markets index was down 6.7% in May, putting it in line with the FTSE 100 (down 6.6%) and just ahead of the S&P 500 (down 8.4%). Eastern Europe was the worst-performing region, with the MSCI Emerging Europe index down 8.4% over the month after a particularly weak showing from the Hungarian markets. The MSCI Latin America, Asia, and Far East indices all fell in line – down 6.73%, 6.81% and 7.18% respectively over the month.
The Chinese market had its weakest month since September 2009 after the Chinese cabinet approved a plan to reform the country’s property tax regime. Property companies are well-represented in the Chinese index and had already been hurt by government measures to bring in higher down-payments and mortgage rates.
Nevertheless, the wider Chinese economy is still growing at speed, with the latest GDP figures showing a rise of 11.9%. The country is also spreading its largesse – Taiwan saw its fastest growth in 30 years, primarily on the back of surging computer chip and display panels to China. It enjoyed GDP growth of 13.3% in the three months to 31 March 2010 and a 62% rise in exports to China in April.
India also saw strong GDP growth – up 8.6% for the three months to 31 March 2010. This was in line with estimates, but raised fears of interest rate rises as the country’s benchmark inflation is around three times that of China. However, the eurozone represents around one-fifth of exports, so this may dampen inflationary pressures. The S&P CNX index was one of the month’s best-performing, down just 2.8%.
Russia finally emerged from the doldrums. Its economy expanded for the first time since 2008 in the first quarter, rising 2.9%. This was lower than expectations, but nonetheless an important turnaround. It is being helped by the sustained strength in the oil price and the government’s $100bn (£68bn) stimulus. However, the Russian RTS index had a dismal month, falling 11.9%.
Brazil is showing signs of above-expectation growth with lending on the increase and construction costs rising and indeed the OECD raised its growth forecasts for the country during the month. The country raised rates in May and is likely to raise them again in June when first quarter GDP data is revealed.
What is best an ISA or a SIPP?
With longer life expectancies many investors are concerned about their retirement income.
Some are now looking to boost their pension funds, either by topping up company schemes, or by using alternative vehicles.One such vehicle is the Individual Savings Account (ISA) which could help to ensure your retirement income is as healthy as possible. ISAs and pension plans are both seen as tax efficient investment vehicles. However, there are big differences between the two. For example, when you put money into your pension plan, the contribution qualifies for a tax rebate at your marginal rate which, for a higher rate taxpayer, can add a significant amount to their investment. However, in exchange for this benefit, you must keep your money invested until at least age 55, and on retirement, the income you receive back is taxable, and counts towards your personal allowances.
With an ISA, the money you invest comes from taxed income and no rebate will be given. However, ISAs have no minimum term - so you can withdraw the proceeds or an income at any time you like. In addition, any income you do withdraw will be tax free and will not count towards any personal allowances. Which approach is best for you depends entirely on your personal situation. Perhaps the healthiest way to approach it is to combine the two.
Some are now looking to boost their pension funds, either by topping up company schemes, or by using alternative vehicles.One such vehicle is the Individual Savings Account (ISA) which could help to ensure your retirement income is as healthy as possible. ISAs and pension plans are both seen as tax efficient investment vehicles. However, there are big differences between the two. For example, when you put money into your pension plan, the contribution qualifies for a tax rebate at your marginal rate which, for a higher rate taxpayer, can add a significant amount to their investment. However, in exchange for this benefit, you must keep your money invested until at least age 55, and on retirement, the income you receive back is taxable, and counts towards your personal allowances.
With an ISA, the money you invest comes from taxed income and no rebate will be given. However, ISAs have no minimum term - so you can withdraw the proceeds or an income at any time you like. In addition, any income you do withdraw will be tax free and will not count towards any personal allowances. Which approach is best for you depends entirely on your personal situation. Perhaps the healthiest way to approach it is to combine the two.
Eurozone crisis spreads
May saw the eurozone crisis building momentum, with some analysts going as far as to doubt whether the euro could remain as a single currency.
With Greece now having sufficient bailout funds to see it through its short-term needs, focus has turned to how the bailout might affect those countries that were providing the cash. Specifically, with economic recovery still fragile, could the price of the Greek bailout be recovery in Europe?
The new phase of the crisis was not reflected in relative market performance, largely because eurozone markets have already dropped significantly this year. The FTSE Eurofirst index was down 5.8% in May, which actually made it the strongest performer of the major markets. The FTSE 100 was down 6.6%, the S&P 500 down 8.4% and the Nikkei down 10%. The major markets of France and Germany saw disparate performance. France’s CAC 40 dropped just 2.3%, while the German Dax was among the worst-performing of all major markets, falling 11%.
In spite of this relatively strong performance, the Europe ex UK sector is still the worst-performing for the year, dropping 11.2% over the year to date. Investors would have been marginally better off in the European Smaller Companies sector, where funds have only fallen 5.8% on average.
There are, of course, plenty of reasons to be concerned about the situation in the eurozone. Among the bad news last month was Spain’s downgrade by Fitch, who cited its “poor growth prospects”. This came in spite of its €15bn (£12.5bn) austerity programme, designed to rein in its deficit. Meanwhile the IMF issued a report that was highly critical of eurozone governments and urged action to stave off disaster. It said “far-reaching reforms were necessary” and singled out Spain for its “dysfunctional labour market and banking sector”.
Yet the economic statistics do not yet reflect the difficulties of the situation. GDP growth between January and March was weak but, at 0.2%, not disastrous. Italy saw the fastest growth, rising 0.5%. Spain managed an anaemic 0.1%, while Germany reversed its weak last quarter with growth of 0.2%. It is a long way off the figures for the US (0.8%), but it does not suggest a crisis.
Jean-Claude Trichet, president of the European Central Bank, said in an interview with French newspaper La Monde that second-quarter growth was coming in higher than expectations. New industrial orders were up 5.2% in March over February and 19.8% up on March 2009. Inflation remains under control. The biggest problem is consumer spending, which will need to improve before recovery can take hold. Sentiment indicators issued at the end of the month showed the sharpest dip in consumer sentiment since 2008. As such, there is plenty of reason to be pessimistic about the outlook for the continent.
With Greece now having sufficient bailout funds to see it through its short-term needs, focus has turned to how the bailout might affect those countries that were providing the cash. Specifically, with economic recovery still fragile, could the price of the Greek bailout be recovery in Europe?
The new phase of the crisis was not reflected in relative market performance, largely because eurozone markets have already dropped significantly this year. The FTSE Eurofirst index was down 5.8% in May, which actually made it the strongest performer of the major markets. The FTSE 100 was down 6.6%, the S&P 500 down 8.4% and the Nikkei down 10%. The major markets of France and Germany saw disparate performance. France’s CAC 40 dropped just 2.3%, while the German Dax was among the worst-performing of all major markets, falling 11%.
In spite of this relatively strong performance, the Europe ex UK sector is still the worst-performing for the year, dropping 11.2% over the year to date. Investors would have been marginally better off in the European Smaller Companies sector, where funds have only fallen 5.8% on average.
There are, of course, plenty of reasons to be concerned about the situation in the eurozone. Among the bad news last month was Spain’s downgrade by Fitch, who cited its “poor growth prospects”. This came in spite of its €15bn (£12.5bn) austerity programme, designed to rein in its deficit. Meanwhile the IMF issued a report that was highly critical of eurozone governments and urged action to stave off disaster. It said “far-reaching reforms were necessary” and singled out Spain for its “dysfunctional labour market and banking sector”.
Yet the economic statistics do not yet reflect the difficulties of the situation. GDP growth between January and March was weak but, at 0.2%, not disastrous. Italy saw the fastest growth, rising 0.5%. Spain managed an anaemic 0.1%, while Germany reversed its weak last quarter with growth of 0.2%. It is a long way off the figures for the US (0.8%), but it does not suggest a crisis.
Jean-Claude Trichet, president of the European Central Bank, said in an interview with French newspaper La Monde that second-quarter growth was coming in higher than expectations. New industrial orders were up 5.2% in March over February and 19.8% up on March 2009. Inflation remains under control. The biggest problem is consumer spending, which will need to improve before recovery can take hold. Sentiment indicators issued at the end of the month showed the sharpest dip in consumer sentiment since 2008. As such, there is plenty of reason to be pessimistic about the outlook for the continent.
Japan suffers big sell off
The Nikkei reversed its recent strong run of form in May, sliding 10% over the month to leave it the worst-performing developed market index,barring the German Dax.
Japan’s markets were driven down by the fear that the country’s export-led recovery could be derailed by the difficulties in the eurozone.Ostensibly, much of the economic news from Japan was good. First-quarter nominal GDP growth of 1.2% marked a second consecutive quarter of growth – a rarity in Japan. The figures showed an improvement in exports to emerging Asia, particularly for new cars and high-tech products, reinforcing the view that Japan may be an increasing beneficiary of Asian growth.
However, the problem is the continued reliance on exports. Only a tiny proportion of the pick-up in GDP could be attributed to private consumption despite a rise in salaries as deflation continues to push the Japanese to hoard cash rather than spend it. The new government has introduced a Y13,000 (£95) monthly child allowance payment, designed to boost consumption. As the first of its kind, it may have the desired effect and stop the Japanese saving rather than spending, but history suggests this is unlikely.
There is a question mark over the continued strength of exports. Although the Japanese economy is more geared to the strength of the US and China, the eurozone is still an important market for its goods. As a result, the Japanese economy may slow between April and June because exports are not sufficiently supportive of growth.
The real hope for the Japanese economy may come from its monetary policy. The government may continue to operate a loose monetary policy through low interest rates and quantitative easing just as many other governments are tightening. This should finally weaken the stubbornly robust yen, support the exporters and help with debt financing.
The government is due to reveal its fiscal consolidation plan in June. The IMF has said it is “critical” that a credible plan is formed. Government debt is still vastly higher than for any other developed country and while the government is still in a position to service the debt for the time being, the situation is unsustainable in the longer term.
Japanese funds, in contrast, are still riding high. The average fund in the Japan sector has returned 11.9% for investors, over the year to date. The smaller companies sector has done even better, returning an average of 13.7% since January, leaving it comfortably the best performing sector in 2010. The UK All Companies sector, by comparison, has fallen 4.88% in that time.
Japan’s markets were driven down by the fear that the country’s export-led recovery could be derailed by the difficulties in the eurozone.Ostensibly, much of the economic news from Japan was good. First-quarter nominal GDP growth of 1.2% marked a second consecutive quarter of growth – a rarity in Japan. The figures showed an improvement in exports to emerging Asia, particularly for new cars and high-tech products, reinforcing the view that Japan may be an increasing beneficiary of Asian growth.
However, the problem is the continued reliance on exports. Only a tiny proportion of the pick-up in GDP could be attributed to private consumption despite a rise in salaries as deflation continues to push the Japanese to hoard cash rather than spend it. The new government has introduced a Y13,000 (£95) monthly child allowance payment, designed to boost consumption. As the first of its kind, it may have the desired effect and stop the Japanese saving rather than spending, but history suggests this is unlikely.
There is a question mark over the continued strength of exports. Although the Japanese economy is more geared to the strength of the US and China, the eurozone is still an important market for its goods. As a result, the Japanese economy may slow between April and June because exports are not sufficiently supportive of growth.
The real hope for the Japanese economy may come from its monetary policy. The government may continue to operate a loose monetary policy through low interest rates and quantitative easing just as many other governments are tightening. This should finally weaken the stubbornly robust yen, support the exporters and help with debt financing.
The government is due to reveal its fiscal consolidation plan in June. The IMF has said it is “critical” that a credible plan is formed. Government debt is still vastly higher than for any other developed country and while the government is still in a position to service the debt for the time being, the situation is unsustainable in the longer term.
Japanese funds, in contrast, are still riding high. The average fund in the Japan sector has returned 11.9% for investors, over the year to date. The smaller companies sector has done even better, returning an average of 13.7% since January, leaving it comfortably the best performing sector in 2010. The UK All Companies sector, by comparison, has fallen 4.88% in that time.
America economy continues to grow
The US economy may have had to revise down its first-quarter GDP growth figures but it began to feel like a model of economic strength compared with its developed market peers.
The Commerce Department said the economy expanded at an annualised rate of 3% in the first three months of the year, rather than its original estimates of 3.2%.It was the third quarter in a row of GDP expansion and, while the pace of growth is clearly slowing, there were clear reasons for optimism. It seems that economic growth is rebalancing away from consumer spending and into industrial production. Manufacturing grew at a faster pace than forecast in the first quarter – both through strong demand for exports and a revival in domestic orders. The Institute for Supply Management said export demand was the highest in 20 years.
Less encouraging were the jobless figures, which showed that US unemployment rose from 9.7% in March to 9.9% in April. This has raised the spectre of a ‘jobless recovery’ and may be acting to depress consumer spending statistics. Although last month’s retail sales figures were higher than expected, analysts pointed to the weak underlying trend. Overall sales were boosted by building materials and gardening equipment, where sales were skewed by incentive programmes.
There is also some danger in being top of the heap. The dollar appreciated further against the euro during the month, ending it at €1.22 to the dollar. It has also remained strong against sterling ending the month at $1.45 to the pound. The US now runs the risk its stronger currency derails its nascent export recovery.
In spite of the relative strength of the US economy, its markets had a weak month. The S&P 500 was down 8.4%, compared to falls of 6.6% in the FTSE 100 and 5.8% in the FTSE Eurofirst. The technology-focused Nasdaq also had a torrid month, dropping 8.7%.
The North America fund sector is still one of the best-performing over the year to date and is second only to Japan among the major markets. The average fund in the sector has delivered 7.73% since the start of the year, compared to a fall of 2.21% in the UK All Companies sector. However, that masks a huge disparity in performance from the underlying funds – the top fund has delivered 21.23% to investors, while the bottom fund has lost 11.58%. Meanwhile the North American Smaller Companies sector has returned an average of 15.86% to unitholders since January.
The Commerce Department said the economy expanded at an annualised rate of 3% in the first three months of the year, rather than its original estimates of 3.2%.It was the third quarter in a row of GDP expansion and, while the pace of growth is clearly slowing, there were clear reasons for optimism. It seems that economic growth is rebalancing away from consumer spending and into industrial production. Manufacturing grew at a faster pace than forecast in the first quarter – both through strong demand for exports and a revival in domestic orders. The Institute for Supply Management said export demand was the highest in 20 years.
Less encouraging were the jobless figures, which showed that US unemployment rose from 9.7% in March to 9.9% in April. This has raised the spectre of a ‘jobless recovery’ and may be acting to depress consumer spending statistics. Although last month’s retail sales figures were higher than expected, analysts pointed to the weak underlying trend. Overall sales were boosted by building materials and gardening equipment, where sales were skewed by incentive programmes.
There is also some danger in being top of the heap. The dollar appreciated further against the euro during the month, ending it at €1.22 to the dollar. It has also remained strong against sterling ending the month at $1.45 to the pound. The US now runs the risk its stronger currency derails its nascent export recovery.
In spite of the relative strength of the US economy, its markets had a weak month. The S&P 500 was down 8.4%, compared to falls of 6.6% in the FTSE 100 and 5.8% in the FTSE Eurofirst. The technology-focused Nasdaq also had a torrid month, dropping 8.7%.
The North America fund sector is still one of the best-performing over the year to date and is second only to Japan among the major markets. The average fund in the sector has delivered 7.73% since the start of the year, compared to a fall of 2.21% in the UK All Companies sector. However, that masks a huge disparity in performance from the underlying funds – the top fund has delivered 21.23% to investors, while the bottom fund has lost 11.58%. Meanwhile the North American Smaller Companies sector has returned an average of 15.86% to unitholders since January.
Weakness in Eurozone affects UK equities
May saw UK All Companies funds squeak ahead of the UK Equity Income sector for the first time this year as managers in the latter grouping were hit by the problems at BP.
The FTSE 350 Low Yield index dipped 5.8% over the month, while the equivalent High Yield index fell 7.6%. That said, the UK All Companies sector has still been one of the worst-performing of all the major markets in 2010. Since the start of the year, it has dipped 2.21%, compared to rises of 7.73% for North America and 11.57% for Japan. Only the eurozone – unsurprisingly – has performed worse, with the average Europe excluding UK fund down 9.66% since January.
The FTSE 100 was one of the better performing markets in May, down ‘just’ 6.6%, compared to falls of 8.4% for the S&P 500 and 10% for the Nikkei. However, this was more by virtue of relative inactivity after the volatility surrounding the election, than any obvious signs of strength.
Some more optimistic signals did emanate from the UK economy. GDP figures for the first three months of the year were revised up from 0.2% to 0.3% while output was given a boost by a strong rebound in industrial production and business services. This latter point cheered some economists who took it as a sign the UK economy was finally rebalancing away from a reliance on consumer spending into industrial production. Industrial output showed growth of 1.2%, compared to a previous estimate of 0.7%.
The first moves by the new coalition Government to rein in public spending were announced. The moves to cut £6.2bn from the public purse were welcomed by rating agencies and more cuts are expected in the Budget on 22 June.
Even so, this did not stop the OECD issuing a surprise warning on interest rates. The organisation said UK rates needed to rise to 3.5% by the end of 2011 in order to stave off increasingly insistent inflationary pressures. The comments were robustly dismissed by many economists, who believe raising rates at the same time as tax rises and cuts in public spending would be suicidal for any recovery.
The UK’s biggest problem at the moment is the weakness of the eurozone, which remains its biggest trading partner, meaning its current problems could destabilise the UK’s anaemic recovery. Any significant deterioration in the euro may also hamper the competitiveness of British exports, which have benefited from the consistent weakness of sterling.
The FTSE 350 Low Yield index dipped 5.8% over the month, while the equivalent High Yield index fell 7.6%. That said, the UK All Companies sector has still been one of the worst-performing of all the major markets in 2010. Since the start of the year, it has dipped 2.21%, compared to rises of 7.73% for North America and 11.57% for Japan. Only the eurozone – unsurprisingly – has performed worse, with the average Europe excluding UK fund down 9.66% since January.
The FTSE 100 was one of the better performing markets in May, down ‘just’ 6.6%, compared to falls of 8.4% for the S&P 500 and 10% for the Nikkei. However, this was more by virtue of relative inactivity after the volatility surrounding the election, than any obvious signs of strength.
Some more optimistic signals did emanate from the UK economy. GDP figures for the first three months of the year were revised up from 0.2% to 0.3% while output was given a boost by a strong rebound in industrial production and business services. This latter point cheered some economists who took it as a sign the UK economy was finally rebalancing away from a reliance on consumer spending into industrial production. Industrial output showed growth of 1.2%, compared to a previous estimate of 0.7%.
The first moves by the new coalition Government to rein in public spending were announced. The moves to cut £6.2bn from the public purse were welcomed by rating agencies and more cuts are expected in the Budget on 22 June.
Even so, this did not stop the OECD issuing a surprise warning on interest rates. The organisation said UK rates needed to rise to 3.5% by the end of 2011 in order to stave off increasingly insistent inflationary pressures. The comments were robustly dismissed by many economists, who believe raising rates at the same time as tax rises and cuts in public spending would be suicidal for any recovery.
The UK’s biggest problem at the moment is the weakness of the eurozone, which remains its biggest trading partner, meaning its current problems could destabilise the UK’s anaemic recovery. Any significant deterioration in the euro may also hamper the competitiveness of British exports, which have benefited from the consistent weakness of sterling.
Monday, 17 May 2010
Emerging markets decline on European debt issues
Share prices and currencies in emerging markets received a boost during April from the news the US Federal Reserve intends to maintain its current near-zero interest-rate policy. Encouraging economic data from the US boosted hopes of a consumer-led recovery that would prove positive for Asian exporters.
However, the European debt crisis triggered a revival in risk aversion that could lead many investors to avoid riskier assets, including those based in emerging markets.
In common with many other indices around the world, the Brazilian Bovespa was affected by growing concerns some European countries might default on their debt. Interest rates in Brazil rose for the first time in over a year during the month, providing a boost for the Brazilian real. Meanwhile, shares in Russian companies fell sharply over the latter part of the month amid fears budget deficits in Europe and moves by China’s government to put a brake on lending activity could derail growth in developing economies.
In India, the Sensex registered its third consecutive monthly gain. The continued strength in the Indian rupee has fuelled hopes foreign investors will be more inclined to invest in Indian companies, attracted by the country’s strong economic outlook. The Reserve Bank of India raised interest rates in an attempt to curb inflation, but warned that the global recovery remains fragile, which could affect India’s exporters.
In China, the Shanghai Composite index fell by 7.7% over April and hit its lowest level since October during the month as China’s government announced plans to cool the domestic property market. The Chinese economy expanded by 11.9% year on year during the first quarter of 2010, having grown by 10.7% during the final quarter of 2009. Speculation grew during the month that China might finally be moving towards a revaluation of the yuan – many commentators believe China’s currency is substantially undervalued.
The International Monetary Fund (IMF) increased its forecast for global economic growth during 2010 to 4.2% and believes that growth will be spearheaded by China. Developing economies are tipped to expand by 6.3% during 2010 and by 6.5% during 2011, while Asia’s economy is forecast to grow by 7.1% during 2010, driven by strong international demand for raw materials and manufactured products. China’s economy is forecast to expand by 10% during 2010, while India’s economy is expected to grow by 8.8%, considerably higher than the IMF’s previous forecast of 7.7%.
However, the European debt crisis triggered a revival in risk aversion that could lead many investors to avoid riskier assets, including those based in emerging markets.
In common with many other indices around the world, the Brazilian Bovespa was affected by growing concerns some European countries might default on their debt. Interest rates in Brazil rose for the first time in over a year during the month, providing a boost for the Brazilian real. Meanwhile, shares in Russian companies fell sharply over the latter part of the month amid fears budget deficits in Europe and moves by China’s government to put a brake on lending activity could derail growth in developing economies.
In India, the Sensex registered its third consecutive monthly gain. The continued strength in the Indian rupee has fuelled hopes foreign investors will be more inclined to invest in Indian companies, attracted by the country’s strong economic outlook. The Reserve Bank of India raised interest rates in an attempt to curb inflation, but warned that the global recovery remains fragile, which could affect India’s exporters.
In China, the Shanghai Composite index fell by 7.7% over April and hit its lowest level since October during the month as China’s government announced plans to cool the domestic property market. The Chinese economy expanded by 11.9% year on year during the first quarter of 2010, having grown by 10.7% during the final quarter of 2009. Speculation grew during the month that China might finally be moving towards a revaluation of the yuan – many commentators believe China’s currency is substantially undervalued.
The International Monetary Fund (IMF) increased its forecast for global economic growth during 2010 to 4.2% and believes that growth will be spearheaded by China. Developing economies are tipped to expand by 6.3% during 2010 and by 6.5% during 2011, while Asia’s economy is forecast to grow by 7.1% during 2010, driven by strong international demand for raw materials and manufactured products. China’s economy is forecast to expand by 10% during 2010, while India’s economy is expected to grow by 8.8%, considerably higher than the IMF’s previous forecast of 7.7%.
Wednesday, 12 May 2010
Japanese companies report strong earnings
Share prices in Japan rebounded towards the end of the month, boosted by strong earnings announcements from leading companies and positive corporate earnings and macroeconomic data from the US. Overall, the Nikkei 225 index fell by 0.3% during the month, while the Topix rose by 0.8%.
Investors in Japan had been unsettled by events in Greece, as the International Monetary Fund (IMF) agreed a €110bn (£95bn) aid package to help Greece tackle its debt crisis and credit ratings agency Standard & Poor’s downgraded the credit ratings of Greece, Spain and Portugal.
The IMF expects Japan’s economy to grow by 1.9% during 2010, compared with its forecast four months ago of growth of 1.7%. Exports are helping the country’s economic expansion, driven by increasing demand from developing economies, and major exporters have benefited from the yen’s ongoing weakness against the US dollar. For example, LCD screen maker Sharp expects net income to rise by more than 1000% this year amid soaring demand for 3D panels.
The Bank of Japan (BoJ) continues to look for ways to support Japan’s economic recovery and is considering additional monetary easing measures to boost growth. The central bank aims to increase credit to lenders in order to ensure they in turn are able to lend to Japanese companies, thereby supporting the economy.
Japan’s economy has been lifted by improvements in overseas economic conditions, but the BoJ remains concerned there is insufficient momentum to support a self-sustaining recovery in domestic private demand. Nevertheless, the Tankan survey of Japanese business sentiment indicated that sentiment continued to improve, particularly among larger companies.
The BoJ maintained Japanese interest rates at 0.1% in April. An improvement in private domestic consumption has been underpinned by loose monetary policy, despite relatively high unemployment. The BoJ expects economic progress to be restrained for some time, but believes that, once the corporate sector picks up, the household sector will follow suit. Household spending, wages and job vacancies appear to be on the rise, although the rate of unemployment increased to 5%.
Prices fell for a 13th consecutive month during March. Cheap imported products from China and India are helping to keep prices down, although the effects are being offset to some degree by higher commodity prices. The BoJ expects the problem of deflation to abate once demand improves, but warned that high commodity prices might eventually lead to a larger-than-expected rise in inflation.
Investors in Japan had been unsettled by events in Greece, as the International Monetary Fund (IMF) agreed a €110bn (£95bn) aid package to help Greece tackle its debt crisis and credit ratings agency Standard & Poor’s downgraded the credit ratings of Greece, Spain and Portugal.
The IMF expects Japan’s economy to grow by 1.9% during 2010, compared with its forecast four months ago of growth of 1.7%. Exports are helping the country’s economic expansion, driven by increasing demand from developing economies, and major exporters have benefited from the yen’s ongoing weakness against the US dollar. For example, LCD screen maker Sharp expects net income to rise by more than 1000% this year amid soaring demand for 3D panels.
The Bank of Japan (BoJ) continues to look for ways to support Japan’s economic recovery and is considering additional monetary easing measures to boost growth. The central bank aims to increase credit to lenders in order to ensure they in turn are able to lend to Japanese companies, thereby supporting the economy.
Japan’s economy has been lifted by improvements in overseas economic conditions, but the BoJ remains concerned there is insufficient momentum to support a self-sustaining recovery in domestic private demand. Nevertheless, the Tankan survey of Japanese business sentiment indicated that sentiment continued to improve, particularly among larger companies.
The BoJ maintained Japanese interest rates at 0.1% in April. An improvement in private domestic consumption has been underpinned by loose monetary policy, despite relatively high unemployment. The BoJ expects economic progress to be restrained for some time, but believes that, once the corporate sector picks up, the household sector will follow suit. Household spending, wages and job vacancies appear to be on the rise, although the rate of unemployment increased to 5%.
Prices fell for a 13th consecutive month during March. Cheap imported products from China and India are helping to keep prices down, although the effects are being offset to some degree by higher commodity prices. The BoJ expects the problem of deflation to abate once demand improves, but warned that high commodity prices might eventually lead to a larger-than-expected rise in inflation.
Monday, 10 May 2010
Demand for corporate bonds continues to slide
In the UK, demand for corporate bonds continued to flag during April as credit-rating downgrades in Greece, Spain and Portugal exacerbated concerns that corporate borrowers might find it harder to fulfil their obligations to lenders.
Ratings agency Standard & Poor’s cut its credit rating for Greece to “junk” status, and downgraded Spain and Portugal. Nevertheless, high-yield bonds remained relatively unscathed by Greece’s predicament –probably because high-yield investors tend to be more accustomed to market volatility.
The UK economy expanded by 0.2% during the first three months of 2010, compared with growth of 0.4% in the final quarter of 2009, and this slower rate of growth was attributed to weakness in the services sector. The International Monetary Fund (IMF) expects the UK economy to expand by 1.3% during 2010 – a figure unchanged from its January forecast.Meanwhile, investors were heartened by a report from the Organisation for Economic Co-operation and Development, which expects economic growth in the UK to outpace most of its G7 colleagues during the second quarter of 2010.
However, the British Chambers of Commerce warned that, although the UK had managed to avoid falling into a “double-dip” recession in the first quarter of 2010, the UK’s economic recovery remains fragile and vulnerable to setbacks. Meanwhile, the National Institute of Economic & Social Research expects the UK economy to “crawl” during 2010, hampered by anaemic consumer spending. The institute forecasts the UK economy will grow by just 1% this year, compared with UK Treasury forecasts for growth of between 1% and 1.5%.
UK inflation accelerated more rapidly than expected during March, rising by 3.4% year on year, according to the Office for National Statistics. Prices were pushed higher by rising costs for transport, fuel, food, clothing and footwear. Sterling’s weakness has increased prices for commodities and other imported goods.
During April, UK house prices registered their first double-digit annual growth since July 2007, according to the Nationwide Building Society. Meanwhile, the British Bankers Association reported that UK mortgage approvals had been 20% higher in March 2010 than in March 2009.
Among UK retail investors, bonds proved the most popular asset class during March, representing approximately half of all net retail sales. The best-selling sector during the month was Sterling Strategic Bond, followed by Global Bonds. Among institutional investors, meanwhile, the Sterling Corporate Bonds sector was the best-selling Investment Management Association grouping, while the Gilts sector experienced substantial outflows.
Link to sterlings website
Ratings agency Standard & Poor’s cut its credit rating for Greece to “junk” status, and downgraded Spain and Portugal. Nevertheless, high-yield bonds remained relatively unscathed by Greece’s predicament –probably because high-yield investors tend to be more accustomed to market volatility.
The UK economy expanded by 0.2% during the first three months of 2010, compared with growth of 0.4% in the final quarter of 2009, and this slower rate of growth was attributed to weakness in the services sector. The International Monetary Fund (IMF) expects the UK economy to expand by 1.3% during 2010 – a figure unchanged from its January forecast.Meanwhile, investors were heartened by a report from the Organisation for Economic Co-operation and Development, which expects economic growth in the UK to outpace most of its G7 colleagues during the second quarter of 2010.
However, the British Chambers of Commerce warned that, although the UK had managed to avoid falling into a “double-dip” recession in the first quarter of 2010, the UK’s economic recovery remains fragile and vulnerable to setbacks. Meanwhile, the National Institute of Economic & Social Research expects the UK economy to “crawl” during 2010, hampered by anaemic consumer spending. The institute forecasts the UK economy will grow by just 1% this year, compared with UK Treasury forecasts for growth of between 1% and 1.5%.
UK inflation accelerated more rapidly than expected during March, rising by 3.4% year on year, according to the Office for National Statistics. Prices were pushed higher by rising costs for transport, fuel, food, clothing and footwear. Sterling’s weakness has increased prices for commodities and other imported goods.
During April, UK house prices registered their first double-digit annual growth since July 2007, according to the Nationwide Building Society. Meanwhile, the British Bankers Association reported that UK mortgage approvals had been 20% higher in March 2010 than in March 2009.
Among UK retail investors, bonds proved the most popular asset class during March, representing approximately half of all net retail sales. The best-selling sector during the month was Sterling Strategic Bond, followed by Global Bonds. Among institutional investors, meanwhile, the Sterling Corporate Bonds sector was the best-selling Investment Management Association grouping, while the Gilts sector experienced substantial outflows.
Link to sterlings website
UK Equities turn south
The FTSE 100 index fell by 2.2 % during April as investor sentiment was negatively affected by the imminent election amid widespread fears of a hung parliament.
These concerns were exacerbated by the news that ratings agency Standard & Poor’s had downgraded the credit ratings of Greece, Spain and Portugal, as investors became increasingly worried a hung parliament could hamper the UK’s chances of adequately addressing its budget deficit.
The oil sector moved back into the spotlight during the month following a report from the Automobile Association that the cost of petrol in the UK had reached a record high. Petrol prices have been driven, so to speak, upwards by rising oil prices, and this has been exacerbated by sterling’s weakness, and a rise in fuel duty.
Looking ahead, the International Monetary Fund expects oil prices to average $80 (£53.40) per barrel in 2010 and $83 per barrel in 2011. Later in the month, shares in BP fell amid fears a massive oil spill in the Gulf of Mexico could cost the company dearly. Elsewhere, the mining sector was hit by concerns that Australia might decide to introduce a tax on mining profits.
The eruption of the Eyjafjallajokull volcano in Iceland proved disruptive for travellers and costly for UK businesses. Airport operator BAA, which is owned by Spanish transport firm Ferrioval, said the disruption would cost the company between £5m and £6m per day.
For its part, British Airways said the effects of the eruption would cost the company between £15m and £20m per day. Meanwhile, tour operator TUI Travel, which owns Thomson and First Choice, estimated the disruption would cost the company between £5m and £6m per day.
According to the CBI Distributive Trades survey, retail sales have continued to pick up. Sales growth among food and footwear retailers has been strong; however, growth at clothing and furniture retailers has been slower. Trading at hardware and home-improvement retailers steadied after falling for the previous three months. M&S reported stronger-than-expected sales growth during its first quarter that were boosted by improving sales of clothing and food in its UK stores.
After proving more popular than bonds for the past six months, equities fell out of favour during March, according to the Investment Management Association. The UK All Companies sector was the least popular fund grouping during the month, experiencing net retail outflows of £689m.
Link to sterlings website
These concerns were exacerbated by the news that ratings agency Standard & Poor’s had downgraded the credit ratings of Greece, Spain and Portugal, as investors became increasingly worried a hung parliament could hamper the UK’s chances of adequately addressing its budget deficit.
The oil sector moved back into the spotlight during the month following a report from the Automobile Association that the cost of petrol in the UK had reached a record high. Petrol prices have been driven, so to speak, upwards by rising oil prices, and this has been exacerbated by sterling’s weakness, and a rise in fuel duty.
Looking ahead, the International Monetary Fund expects oil prices to average $80 (£53.40) per barrel in 2010 and $83 per barrel in 2011. Later in the month, shares in BP fell amid fears a massive oil spill in the Gulf of Mexico could cost the company dearly. Elsewhere, the mining sector was hit by concerns that Australia might decide to introduce a tax on mining profits.
The eruption of the Eyjafjallajokull volcano in Iceland proved disruptive for travellers and costly for UK businesses. Airport operator BAA, which is owned by Spanish transport firm Ferrioval, said the disruption would cost the company between £5m and £6m per day.
For its part, British Airways said the effects of the eruption would cost the company between £15m and £20m per day. Meanwhile, tour operator TUI Travel, which owns Thomson and First Choice, estimated the disruption would cost the company between £5m and £6m per day.
According to the CBI Distributive Trades survey, retail sales have continued to pick up. Sales growth among food and footwear retailers has been strong; however, growth at clothing and furniture retailers has been slower. Trading at hardware and home-improvement retailers steadied after falling for the previous three months. M&S reported stronger-than-expected sales growth during its first quarter that were boosted by improving sales of clothing and food in its UK stores.
After proving more popular than bonds for the past six months, equities fell out of favour during March, according to the Investment Management Association. The UK All Companies sector was the least popular fund grouping during the month, experiencing net retail outflows of £689m.
Link to sterlings website
Global economic outlook improves
One year after global equity markets plumbed their depths, most major indices ended the month – and the first quarter of 2010 – in positive territory.
In the UK, the FTSE 100 index rose by more than 60% from its lows of March 2009, fuelling speculation during the month the benchmark index might move closer to the 6,000-point level. News during March was dominated by the announcement of the last Budget before the General Election. The Chancellor expects the UK’s massive budget deficit to fall from 11.8% of GDP to 4% by 2015, although some commentators criticised his Budget for a lack of detail as to how this could actually be achieved.
According to the Investment Management Association, UK retail investors’ appetite for mutual funds recovered during the first quarter of 2010, and net retail sales experienced their best-ever January in 2010, notching up sales that were 55% higher than in January 2009. In contrast to that period, equities proved more attractive to retail investors than bonds as the idea of risk regained its appeal.
In the US, share prices continued to make upward progress as investors became more confident in the sustainability of the economic recovery. In particular, US stocks received a boost during the month after the Federal Reserve confirmed that it intends to maintain interest rates at their current near-zero level in order to support the economic recovery. Meanwhile, US retail sales posted an unexpected rise during February, increasing by 0.3%, month on month, despite February’s unusually snowy weather.
In Europe, the euro continued to wobble against other key currencies amid worries that Greece might not be able to obtain financial support from the European Union – a possibility that might force Greek leaders to approach the International Monetary Fund for aid.
Elsewhere, Asian stocks experienced some volatility during the month amid fears that central banks within the region might decide to increase measures to cool inflationary pressures. In China, surging export activity led to renewed calls for the government to increase the value of the yuan.
According to a recent survey conducted by the Japanese government, optimism among large manufacturers in the country increased for a third consecutive quarter, suggesting that its economy has been helped out of recession by growing export activity. However, falling prices have meant that service companies have not benefited from the export-led recovery and deflationary pressures remain a concern.
Link to website
In the UK, the FTSE 100 index rose by more than 60% from its lows of March 2009, fuelling speculation during the month the benchmark index might move closer to the 6,000-point level. News during March was dominated by the announcement of the last Budget before the General Election. The Chancellor expects the UK’s massive budget deficit to fall from 11.8% of GDP to 4% by 2015, although some commentators criticised his Budget for a lack of detail as to how this could actually be achieved.
According to the Investment Management Association, UK retail investors’ appetite for mutual funds recovered during the first quarter of 2010, and net retail sales experienced their best-ever January in 2010, notching up sales that were 55% higher than in January 2009. In contrast to that period, equities proved more attractive to retail investors than bonds as the idea of risk regained its appeal.
In the US, share prices continued to make upward progress as investors became more confident in the sustainability of the economic recovery. In particular, US stocks received a boost during the month after the Federal Reserve confirmed that it intends to maintain interest rates at their current near-zero level in order to support the economic recovery. Meanwhile, US retail sales posted an unexpected rise during February, increasing by 0.3%, month on month, despite February’s unusually snowy weather.
In Europe, the euro continued to wobble against other key currencies amid worries that Greece might not be able to obtain financial support from the European Union – a possibility that might force Greek leaders to approach the International Monetary Fund for aid.
Elsewhere, Asian stocks experienced some volatility during the month amid fears that central banks within the region might decide to increase measures to cool inflationary pressures. In China, surging export activity led to renewed calls for the government to increase the value of the yuan.
According to a recent survey conducted by the Japanese government, optimism among large manufacturers in the country increased for a third consecutive quarter, suggesting that its economy has been helped out of recession by growing export activity. However, falling prices have meant that service companies have not benefited from the export-led recovery and deflationary pressures remain a concern.
Link to website
Friday, 16 April 2010
The US economy gains momentum
US share prices continued to rise as investors became more confident in the strength and sustainability of the recovery of the world’s largest economy. By the end of the first quarter of 2010, the S&P 500 index had registered gains in two months out of the three, only posting a decline during January.
Consumer spending has strengthened while inflation has remained relatively benign while the rate of inflation remained unchanged during February, rising by 2.1%, year on year. Investors were reassured during the month by the news of the US Federal Reserve’s decision to maintain the country’s interest rates at zero to 0.25% in order to support the budding economic recovery.
Shares in General Electric rose after the company announced it hoped to restore dividend payouts in future. Meanwhile, third-quarter profits at FedEx more than doubled, year on year, as economic recovery led to a rise in shipments in Europe and Asia.
Elsewhere, following a protracted dispute between Google and the Chinese government about censorship within China, the world’s leading search engine chose to redirect mainline users in China to a Hong Kong website without filters. The move was applauded by anti-censorship campaigners but is likely to harm Google’s ability to develop within one of the world’s fastest-growing economies.
Index providers Standard & Poor’s reported that, of the 7,000 companies that report dividend information to it, only 48 cut their dividends during the first three months of 2010, compared with a record 367 during the first quarter of 2009. Indeed, Starbucks, the world’s leading coffee-shop operator, announced its first-ever dividend payout to shareholders since the company was floated on the stockmarket in 1992.
Despite unusually severe winter weather during February, retail sales registered an unexpected increase, rising by 0.3%, month on month. However, the heavy snowfalls hampered housing starts, which fell during the month.
Consumer sentiment remained anaemic and the rate of unemployment held steady at 9.7% during February. Meanwhile, the price of goods imported into the US fell more steeply than expected, suggesting overseas companies are wary of attempting to raise prices as the US economy continues its revival, for fear of derailing demand.
During the month, the US House of Representatives narrowly passed President Obama’s controversial healthcare reforms, which will lead to more than 30 million uninsured Americans being covered by health insurance. It is planned that the new measures will be financed primarily by new taxes.
Article
Consumer spending has strengthened while inflation has remained relatively benign while the rate of inflation remained unchanged during February, rising by 2.1%, year on year. Investors were reassured during the month by the news of the US Federal Reserve’s decision to maintain the country’s interest rates at zero to 0.25% in order to support the budding economic recovery.
Shares in General Electric rose after the company announced it hoped to restore dividend payouts in future. Meanwhile, third-quarter profits at FedEx more than doubled, year on year, as economic recovery led to a rise in shipments in Europe and Asia.
Elsewhere, following a protracted dispute between Google and the Chinese government about censorship within China, the world’s leading search engine chose to redirect mainline users in China to a Hong Kong website without filters. The move was applauded by anti-censorship campaigners but is likely to harm Google’s ability to develop within one of the world’s fastest-growing economies.
Index providers Standard & Poor’s reported that, of the 7,000 companies that report dividend information to it, only 48 cut their dividends during the first three months of 2010, compared with a record 367 during the first quarter of 2009. Indeed, Starbucks, the world’s leading coffee-shop operator, announced its first-ever dividend payout to shareholders since the company was floated on the stockmarket in 1992.
Despite unusually severe winter weather during February, retail sales registered an unexpected increase, rising by 0.3%, month on month. However, the heavy snowfalls hampered housing starts, which fell during the month.
Consumer sentiment remained anaemic and the rate of unemployment held steady at 9.7% during February. Meanwhile, the price of goods imported into the US fell more steeply than expected, suggesting overseas companies are wary of attempting to raise prices as the US economy continues its revival, for fear of derailing demand.
During the month, the US House of Representatives narrowly passed President Obama’s controversial healthcare reforms, which will lead to more than 30 million uninsured Americans being covered by health insurance. It is planned that the new measures will be financed primarily by new taxes.
Article
FTSE 100 continues to rally
One year after the UK stockmarket hit its recent bottom, the FTSE 100 index has risen by more than 60% from its lows of March 2009. This strong recovery triggered renewed speculation that the benchmark index might be within credible distance of the psychologically important 6,000-point level. During the course of March, the Footsie reached its highest level since June 2008.
HSBC reported full-year profits that were hit by higher costs resulting from bad loans. The subject of pay and bonuses within the financial sector remains both sensitive and highly controversial – nevertheless, HSBC put aside 25% of the revenue generated by its investment-banking arm to pay employees within the division.
For its part, Royal Bank of Scotland reported its pension deficit rose to £2.91bn last year. The bank admitted this deficit might continue to increase and also warned that this might “have a negative impact on the group’s capital position … or result in a loss of value in its securities”.
Lloyds Banking Group announced its management expects the company to return to profit this year, as the impact from bad loans appears to be less severe than previously thought. Meanwhile, insurers Legal & General announced a return to profit for 2009, despite experiencing lower sales in “difficult” markets, and raised its dividend payout by 33%.
Department-store operator Debenhams announced a rise in first-half sales and profits during the month. Earnings were boosted by the company’s decision to increase the amount of selling space for its own-brand ranges. Elsewhere bicycle and car equipment retailer Halfords expects full-year earnings to beat consensus forecasts, driven by effective cost control. However, floor-covering retailer Carpetright warned profits are likely to be below consensus expectations.
In the energy sector, full-year 2009 profits rose at oil exploration & extraction company Cairn Energy to $53m (£34.45m), compared with $11m in 2008. Elsewhere, Weir Group, which manufactures pumps for the mining sector, announced better-than-expected profits. The company expects demand for its products to rise this year and increased its dividend by 14%.
Internet gaming company 888 Holdings announced a decline in full-year profits, highlighting the difficult economic environment and the effects of foreign exchange as reasons for the drop. Towards the end of the month, rail support services company Jarvis announced it was being put into administration, citing difficult trading conditions and a substantial drop in the volume of rail and plant work.
Article
HSBC reported full-year profits that were hit by higher costs resulting from bad loans. The subject of pay and bonuses within the financial sector remains both sensitive and highly controversial – nevertheless, HSBC put aside 25% of the revenue generated by its investment-banking arm to pay employees within the division.
For its part, Royal Bank of Scotland reported its pension deficit rose to £2.91bn last year. The bank admitted this deficit might continue to increase and also warned that this might “have a negative impact on the group’s capital position … or result in a loss of value in its securities”.
Lloyds Banking Group announced its management expects the company to return to profit this year, as the impact from bad loans appears to be less severe than previously thought. Meanwhile, insurers Legal & General announced a return to profit for 2009, despite experiencing lower sales in “difficult” markets, and raised its dividend payout by 33%.
Department-store operator Debenhams announced a rise in first-half sales and profits during the month. Earnings were boosted by the company’s decision to increase the amount of selling space for its own-brand ranges. Elsewhere bicycle and car equipment retailer Halfords expects full-year earnings to beat consensus forecasts, driven by effective cost control. However, floor-covering retailer Carpetright warned profits are likely to be below consensus expectations.
In the energy sector, full-year 2009 profits rose at oil exploration & extraction company Cairn Energy to $53m (£34.45m), compared with $11m in 2008. Elsewhere, Weir Group, which manufactures pumps for the mining sector, announced better-than-expected profits. The company expects demand for its products to rise this year and increased its dividend by 14%.
Internet gaming company 888 Holdings announced a decline in full-year profits, highlighting the difficult economic environment and the effects of foreign exchange as reasons for the drop. Towards the end of the month, rail support services company Jarvis announced it was being put into administration, citing difficult trading conditions and a substantial drop in the volume of rail and plant work.
Article
Friday, 9 April 2010
Demand for corporate bonds falls
According to the Investment Management Association (IMA), net retail sales in the UK experienced their best-ever January . However, sterling corporate bond funds proved to be the least popular sector during the month, despite having headed the IMA’s sales charts for the first eight months of 2009.
During January, the sterling corporate bond sector experienced outflows of £228m. Overall, bonds accounted for only 17% of net retail sales during the month although they were the highest-selling asset class within the institutional sector.
While demand for bonds has waned somewhat, market watchers still see good value in the UK corporate bond sector – although many experts advocate careful issuer selection. Low interest rates and expectations of relatively subdued inflation should provide a supportive environment for bond markets in general. Meanwhile, amid growing evidence that the economic recovery is gathering pace, high-yield bond issuance appears to have picked up, indicating that investors are becoming more sanguine about the economic recovery and are therefore more willing to take on risk.
In his last Budget before the General Election, Chancellor of the Exchequer Alistair Darling confirmed his previous forecast for UK economic growth of 1% to 1.5% in 2010, but reduced his previous forecast for 2011 to 3% to 3.5%, bringing his predictions for 2011 in line with those of the Bank of England.
The Chancellor expects the budget deficit to decline from 11.8% of GDP to 4% by April 2015, but plans to postpone spending cuts until 2011 in order to allow the economy time to recover. Meanwhile, political uncertainty is weighing on the pound amid growing fears of a hung parliament after the General Election. Such an outcome would be likely to reduce the chance of a swift and decisive resolution to the budget deficit.
The Confederation of British Industry (CBI) warned that the UK’s economic recovery is likely to be “slow and sluggish” during 2010, hampered by consumers’ ongoing desire to save rather than spend. Overall, the organisation expects the UK to register economic growth of 1% in 2010 and 2.5% in 2011, but warned of the “lack of a clear driver for growth”.
According to the CBI, UK factory orders continued to recover, boosted by a rise in export orders. It foresees UK export orders “”steadily improving as global demand is starting to recover”, but warned that domestic demand remains very weak, which might hamper growth in manufacturing output.
Article
During January, the sterling corporate bond sector experienced outflows of £228m. Overall, bonds accounted for only 17% of net retail sales during the month although they were the highest-selling asset class within the institutional sector.
While demand for bonds has waned somewhat, market watchers still see good value in the UK corporate bond sector – although many experts advocate careful issuer selection. Low interest rates and expectations of relatively subdued inflation should provide a supportive environment for bond markets in general. Meanwhile, amid growing evidence that the economic recovery is gathering pace, high-yield bond issuance appears to have picked up, indicating that investors are becoming more sanguine about the economic recovery and are therefore more willing to take on risk.
In his last Budget before the General Election, Chancellor of the Exchequer Alistair Darling confirmed his previous forecast for UK economic growth of 1% to 1.5% in 2010, but reduced his previous forecast for 2011 to 3% to 3.5%, bringing his predictions for 2011 in line with those of the Bank of England.
The Chancellor expects the budget deficit to decline from 11.8% of GDP to 4% by April 2015, but plans to postpone spending cuts until 2011 in order to allow the economy time to recover. Meanwhile, political uncertainty is weighing on the pound amid growing fears of a hung parliament after the General Election. Such an outcome would be likely to reduce the chance of a swift and decisive resolution to the budget deficit.
The Confederation of British Industry (CBI) warned that the UK’s economic recovery is likely to be “slow and sluggish” during 2010, hampered by consumers’ ongoing desire to save rather than spend. Overall, the organisation expects the UK to register economic growth of 1% in 2010 and 2.5% in 2011, but warned of the “lack of a clear driver for growth”.
According to the CBI, UK factory orders continued to recover, boosted by a rise in export orders. It foresees UK export orders “”steadily improving as global demand is starting to recover”, but warned that domestic demand remains very weak, which might hamper growth in manufacturing output.
Article
Emerging markets bounce back
The Global Emerging Markets sector benefited from investors returning to riskier assets in March. Having languished at the bottom of the table for much of early 2010, the average fund is now up 9.35% for the year to date.
Eastern Europe bounced back from a difficult month in February, as the Greek situation started to resolve itself. The MSCI Emerging Markets Europe index was up 9.67% for the month with a particularly strong performance from the Turkish, Polish and Hungarian markets. The Czech Republic remained weak and rose just 1.11% over the month.
For their part, the Russian markets benefited from a strong tick-up in the oil price towards the end of the month with the MSCI Russia index rising 8.56%. Andrei Klepach, the country’s deputy minister for economic development, said the Russian economy may grow faster than official estimates in 2010 and added that the current predictions of 3% to 3.5% were ‘conservative’ and real growth was likely to be nearer 4% to 4.5%.
In East Asia, a World Bank report said output, exports and employment had returned to pre-crisis levels and, again, China has been the engine of growth. Real GDP in developing East Asia is predicted to rise 8.7% in 2010, from 7% in 2009. The report said stimulus measures were also being withdrawn in the region, but private consumption had not yet emerged to take the strain.
The FTSE Xinhua index rose 3.8% over the month – significantly behind the developed market indices. The Hang Seng’s rise was also muted, at just 1.9%, while the index of Chinese listed shares – the Shanghai 180 – rose 2.5%.
Brazil’s Bovespa index resumed its strong run, rising 5.8% over the month. The country’s economy grew 2% in the last quarter, showing its growth rate is accelerating. IMG, one of the world’s largest sports and entertainment marketing groups, endorsed Brazil’s growth potential by announcing a joint venture with Globo, the country’s largest television network. The group has already made a successful push into India and is planning a China venture as well.
India’s S&P/CNX 500 index rose 3.4% over the month while Standard & Poor’s lifted its negative outlook on the country’s sovereign credit rating. The rating agency said it was encouraged by a promise from Pranab Mukherjee, India’s finance minister, that the central and state government deficit would fall from 9.8% of GDP for the year to March 2010 to 8.3% next year and 5.4% by 2015. The group also revised its prediction for India’s 2010 GDP growth rate up to 8%.
Article
Eastern Europe bounced back from a difficult month in February, as the Greek situation started to resolve itself. The MSCI Emerging Markets Europe index was up 9.67% for the month with a particularly strong performance from the Turkish, Polish and Hungarian markets. The Czech Republic remained weak and rose just 1.11% over the month.
For their part, the Russian markets benefited from a strong tick-up in the oil price towards the end of the month with the MSCI Russia index rising 8.56%. Andrei Klepach, the country’s deputy minister for economic development, said the Russian economy may grow faster than official estimates in 2010 and added that the current predictions of 3% to 3.5% were ‘conservative’ and real growth was likely to be nearer 4% to 4.5%.
In East Asia, a World Bank report said output, exports and employment had returned to pre-crisis levels and, again, China has been the engine of growth. Real GDP in developing East Asia is predicted to rise 8.7% in 2010, from 7% in 2009. The report said stimulus measures were also being withdrawn in the region, but private consumption had not yet emerged to take the strain.
The FTSE Xinhua index rose 3.8% over the month – significantly behind the developed market indices. The Hang Seng’s rise was also muted, at just 1.9%, while the index of Chinese listed shares – the Shanghai 180 – rose 2.5%.
Brazil’s Bovespa index resumed its strong run, rising 5.8% over the month. The country’s economy grew 2% in the last quarter, showing its growth rate is accelerating. IMG, one of the world’s largest sports and entertainment marketing groups, endorsed Brazil’s growth potential by announcing a joint venture with Globo, the country’s largest television network. The group has already made a successful push into India and is planning a China venture as well.
India’s S&P/CNX 500 index rose 3.4% over the month while Standard & Poor’s lifted its negative outlook on the country’s sovereign credit rating. The rating agency said it was encouraged by a promise from Pranab Mukherjee, India’s finance minister, that the central and state government deficit would fall from 9.8% of GDP for the year to March 2010 to 8.3% next year and 5.4% by 2015. The group also revised its prediction for India’s 2010 GDP growth rate up to 8%.
Article
UK companies beating earnings expectations
Higher-yielding stocks continued to underperform in March, in spite of a much improved outlook for dividends. The FTSE 350 Higher Yield index returned less than half of its lower yield counterpart over the month as markets saw another jump up.
The higher yield index rose 3.7%, while the lower yield index rose 8.6%. The overall yield on the FTSE 100 fell from 3.48% to 3.27% as share prices rose.However, with more companies beating earnings expectations, the outlook for dividends continued to improve and indeed data group Markit now predicts a rise in dividends of 18% in 2010. The group based its prediction on the 161 FTSE 350 companies that have already reported earnings of which 47% have beaten forecasts while only 27% have missed. That said, it is some of the big dividend names that have missed – most notably GlaxoSmithKline.
There may be some small distortion in the figures as a number of companies have rushed to pay dividends before the introduction of the 50% tax rate. Others have issued special or quarterly dividends. Even so, there has been plenty of good corporate news for dividend seekers. HSBC issued an upbeat statement on the outlook for L&G’s dividend, for example, saying the insurer is likely to generate a cash surplus of £1bn over the next few years, some of which will find its way into higher payouts for shareholders.
Elsewhere, Kingfisher raised its dividend for the first time in five years as B&Q posted better than expected like-for-like sales. Equally, AG Barr raised its full-year dividend as Irn Bru sales benefited from the wider improvement in the economy whil Kazakhmys reinstated its dividends as the copper price continued to perform well. IMI also raised its dividend on the back of improved sales while Man Group saw funds under management dip 7%, but still maintained its dividend.
Shell was less positive, saying that even though production was likely to increase faster than expected over the next three years, dividends would remain at their current level. It also changed its dividend policy from ‘increasing in line with inflation’ to ‘calculating payments in line with the view of underlying earnings and cash flow’.
The UK Equity Income sector is still trailing over the year to date, with the average fund currently up 5.38% for the year. This compares to a return from the UK All Companies sector of 6.84% although UK Equity Income & Growth is the worst performer, delivering just 4.92%.
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Feedbase
The higher yield index rose 3.7%, while the lower yield index rose 8.6%. The overall yield on the FTSE 100 fell from 3.48% to 3.27% as share prices rose.However, with more companies beating earnings expectations, the outlook for dividends continued to improve and indeed data group Markit now predicts a rise in dividends of 18% in 2010. The group based its prediction on the 161 FTSE 350 companies that have already reported earnings of which 47% have beaten forecasts while only 27% have missed. That said, it is some of the big dividend names that have missed – most notably GlaxoSmithKline.
There may be some small distortion in the figures as a number of companies have rushed to pay dividends before the introduction of the 50% tax rate. Others have issued special or quarterly dividends. Even so, there has been plenty of good corporate news for dividend seekers. HSBC issued an upbeat statement on the outlook for L&G’s dividend, for example, saying the insurer is likely to generate a cash surplus of £1bn over the next few years, some of which will find its way into higher payouts for shareholders.
Elsewhere, Kingfisher raised its dividend for the first time in five years as B&Q posted better than expected like-for-like sales. Equally, AG Barr raised its full-year dividend as Irn Bru sales benefited from the wider improvement in the economy whil Kazakhmys reinstated its dividends as the copper price continued to perform well. IMI also raised its dividend on the back of improved sales while Man Group saw funds under management dip 7%, but still maintained its dividend.
Shell was less positive, saying that even though production was likely to increase faster than expected over the next three years, dividends would remain at their current level. It also changed its dividend policy from ‘increasing in line with inflation’ to ‘calculating payments in line with the view of underlying earnings and cash flow’.
The UK Equity Income sector is still trailing over the year to date, with the average fund currently up 5.38% for the year. This compares to a return from the UK All Companies sector of 6.84% although UK Equity Income & Growth is the worst performer, delivering just 4.92%.
Article
Feedbase
Strong Rally in Japanese market
Japan retained its place at the top of the IMA sector table this month, with funds now up by an average of 15.4% for the year to date. Much of this performance has come from the depreciation of the pound versus the yen, but the stockmarket has performed strongly too.
The Nikkei was the best-performing developed market over the month – rising 9.5%, ahead of the FTSE 100, which rose 6.1%, the S&P 500, up 5.8%, and the FTSE Eurofirst index, up 7.2%. Japan fund managers are still suggesting stocks in the region are fairly priced and that many companies are likely to beat earnings expectations.
As ever with Japan, the economic picture was mixed. Fourth-quarter GDP numbers were revised down from 4.6% to 3.8% as private sector inventories proved weaker than expected. However, the government suggested a double-dip recession had become less likely. Analysts in the region backed that view and retained some optimism on the outlook for the Japanese economy.
This optimism was premised on a number of factors, the first being a muted rise in consumer spending – just 0.7% – in the final quarter of the year, which suggested the recovery may be broadening out from purely government-led stimulus packages. Equally, unemployment fell below 5% for the first time in a year in February. A recovery in exports has been key to improving employment prospects.
Debt remains a worry and there is no shortage of analysts suggesting Japan will be another ‘next Greece’. Investors are still buying Japanese government bonds, even with coupons as low as 1.4%, and the most recent government bond issue went without a hitch. With government bond issues exceeding tax revenues in 2009, the sustainability of the situation looks fragile but, for the time being, Japan ticks on.
That said, industrial production figures slipped from January to February, their first fall in a year. Admittedly, they were still up 31.3% on last year, but it did lead some analysts to question whether government confidence in an unbroken recovery may be misplaced. Deflation persists and prices were down a further 1.2% in February.
It is the strength of the corporate sector, however, that is giving fund managers cause for optimism. With low debt, improving earnings and their strong leverage towards the global economic recovery, Japanese companies look in rude health relative to many of their global peers. Valuations are low compared to their 20-year average but the question remains whether they can transcend Japan’s still parlous economic conditions.
Article
The Nikkei was the best-performing developed market over the month – rising 9.5%, ahead of the FTSE 100, which rose 6.1%, the S&P 500, up 5.8%, and the FTSE Eurofirst index, up 7.2%. Japan fund managers are still suggesting stocks in the region are fairly priced and that many companies are likely to beat earnings expectations.
As ever with Japan, the economic picture was mixed. Fourth-quarter GDP numbers were revised down from 4.6% to 3.8% as private sector inventories proved weaker than expected. However, the government suggested a double-dip recession had become less likely. Analysts in the region backed that view and retained some optimism on the outlook for the Japanese economy.
This optimism was premised on a number of factors, the first being a muted rise in consumer spending – just 0.7% – in the final quarter of the year, which suggested the recovery may be broadening out from purely government-led stimulus packages. Equally, unemployment fell below 5% for the first time in a year in February. A recovery in exports has been key to improving employment prospects.
Debt remains a worry and there is no shortage of analysts suggesting Japan will be another ‘next Greece’. Investors are still buying Japanese government bonds, even with coupons as low as 1.4%, and the most recent government bond issue went without a hitch. With government bond issues exceeding tax revenues in 2009, the sustainability of the situation looks fragile but, for the time being, Japan ticks on.
That said, industrial production figures slipped from January to February, their first fall in a year. Admittedly, they were still up 31.3% on last year, but it did lead some analysts to question whether government confidence in an unbroken recovery may be misplaced. Deflation persists and prices were down a further 1.2% in February.
It is the strength of the corporate sector, however, that is giving fund managers cause for optimism. With low debt, improving earnings and their strong leverage towards the global economic recovery, Japanese companies look in rude health relative to many of their global peers. Valuations are low compared to their 20-year average but the question remains whether they can transcend Japan’s still parlous economic conditions.
Article
Euro-zone benefiting from falling Euro
News from the eurozone continues to be dominated by the problems in Greece, with the end of the month seeing the grouping’s leaders agree a £20bn financial aid package for the country if it runs into difficulties with its debt repayments.
The euro fell sharply on rumours Greece had tried to renegotiate the terms of its bailout package – which its government vehemently denied – while the country is still struggling with social unrest.If nothing else, the problems are putting downward pressure on the euro, which has helped some parts of the eurozone’s economy. The currency has weakened around 10% against the dollar since the start of the year. The effect of the euro’s depreciation was most apparent in industrial production figures, which rose 1.7% in January – much more than expected. The growth came from ‘durable’ consumer goods, such as cars, furniture and appliances, and raised hopes the weak GDP growth figures for the last quarter of 2010 might be revised up.
Confidence indicators improved although they were unevenly spread between countries. France and Greece saw confidence improve, while Greece, Spain and Portugal all continued to suffer. Germany had some more encouraging statistics after weak GDP data for the final quarter of 2009 as unemployment continued to fall – from 8.1% to 8% - in contrast with much of the rest of the eurozone.
The picture elsewhere was bleaker. Portugal saw its rating downgraded by Fitch on the back of its escalating debt while Ireland’s problems seem entrenched – the economy ticked down 2.3% in the last quarter. The country’s momentary lift out of recession proved short-lived as the rise in the previous quarter was also revised down.
Europe excluding UK funds have languished since the start of the year. The average fund has returned 4.36% to investors over the year to date, leaving it significantly behind the UK All Companies sector, where the average fund has delivered 6.84%.
The declining euro is likely to prove a headwind for UK investors. There is some support for the view that the euro is about to see a precipitous drop as currency markets wise up to the relative strength of individual global economies – particularly after a recent assessment by the OECD suggested the eurozone recovery is stalling while those of the UK and US are moving ahead.
European markets did reasonably well during March. The FTSE Eurofirst index delivered 7.2% – about 1.1% ahead of the FTSE 100 and 1.4% ahead of the S&P 500. Germany’s Dax was the strongest of the individual markets, rising 8.9%, while France’s CAC 40 rose just 6.3%.
Article
The euro fell sharply on rumours Greece had tried to renegotiate the terms of its bailout package – which its government vehemently denied – while the country is still struggling with social unrest.If nothing else, the problems are putting downward pressure on the euro, which has helped some parts of the eurozone’s economy. The currency has weakened around 10% against the dollar since the start of the year. The effect of the euro’s depreciation was most apparent in industrial production figures, which rose 1.7% in January – much more than expected. The growth came from ‘durable’ consumer goods, such as cars, furniture and appliances, and raised hopes the weak GDP growth figures for the last quarter of 2010 might be revised up.
Confidence indicators improved although they were unevenly spread between countries. France and Greece saw confidence improve, while Greece, Spain and Portugal all continued to suffer. Germany had some more encouraging statistics after weak GDP data for the final quarter of 2009 as unemployment continued to fall – from 8.1% to 8% - in contrast with much of the rest of the eurozone.
The picture elsewhere was bleaker. Portugal saw its rating downgraded by Fitch on the back of its escalating debt while Ireland’s problems seem entrenched – the economy ticked down 2.3% in the last quarter. The country’s momentary lift out of recession proved short-lived as the rise in the previous quarter was also revised down.
Europe excluding UK funds have languished since the start of the year. The average fund has returned 4.36% to investors over the year to date, leaving it significantly behind the UK All Companies sector, where the average fund has delivered 6.84%.
The declining euro is likely to prove a headwind for UK investors. There is some support for the view that the euro is about to see a precipitous drop as currency markets wise up to the relative strength of individual global economies – particularly after a recent assessment by the OECD suggested the eurozone recovery is stalling while those of the UK and US are moving ahead.
European markets did reasonably well during March. The FTSE Eurofirst index delivered 7.2% – about 1.1% ahead of the FTSE 100 and 1.4% ahead of the S&P 500. Germany’s Dax was the strongest of the individual markets, rising 8.9%, while France’s CAC 40 rose just 6.3%.
Article
Thursday, 18 March 2010
Preparing for possible inflation
The UK Consumer Price Index saw a rise in the annual rate for January 2010, from 2.9% to 3.5%. Despite the longest recession since World War II, talk has already turned to the future - and the worry that inflation could take hold if the fiscal stimuli used to try and prompt recovery stay in place too long.
Inflation has been low for a while now. Back in the late 80s and 90s, monthly inflation figures were much higher - peaking at 8.5% in April 1991. But some will remember the economic slump of the 1970s, which was triggered by double-digit inflation - and may be nervous.
As recently as mid 2008, we saw inflation around 5%, driven by energy costs and higher prices for vegetables, furniture, and cigarettes. House prices and housing costs also impacted. This threat passed as the recession extended and the Bank of England and the Government put a lot of new money into the economy to try and encourage some growth. However, they now need to be careful how this works through or inflation could easily take hold again.
At the moment, there is probably less reason for concern than in the 1970s and early 1980s. The economic outlook is still nervous as lower than expected, growth in Q4 2009, despite confirming an end to the recesson for now, could indicate that growth might halt again as consumers consider tightening up on spending after the Christmas spree.
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Inflation has been low for a while now. Back in the late 80s and 90s, monthly inflation figures were much higher - peaking at 8.5% in April 1991. But some will remember the economic slump of the 1970s, which was triggered by double-digit inflation - and may be nervous.
As recently as mid 2008, we saw inflation around 5%, driven by energy costs and higher prices for vegetables, furniture, and cigarettes. House prices and housing costs also impacted. This threat passed as the recession extended and the Bank of England and the Government put a lot of new money into the economy to try and encourage some growth. However, they now need to be careful how this works through or inflation could easily take hold again.
At the moment, there is probably less reason for concern than in the 1970s and early 1980s. The economic outlook is still nervous as lower than expected, growth in Q4 2009, despite confirming an end to the recesson for now, could indicate that growth might halt again as consumers consider tightening up on spending after the Christmas spree.
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UK housing market still struggling
The UK housing boom reached its peak in 2007 but since then, house prices have taken a knock, ravaged by the credit crisis and the effects of the recession. However, data for 2009 suggest the market is now showing signs of recovery. The Nationwide declared that house prices rose by nearly 6% over the year (albeit from a low base) which should come as welcome news for many beleaguered householders – but does it herald the start of a sustainable recovery?
The British Bankers’ Association (BBA) November release announced that the number of mortgage approvals for house purchase was holding up and were back to similar levels of two years ago. However, the average value of those mortgages remained slightly lower than 2007 and remortgages are virtually non-existent as existing borrowers revert to low variable rates when their mortgage deals end. Ernst & Young’s Item Club expects the UK housing market to get worse before it gets better as tight credit conditions linger, warning that current signs of recovery are a "false dawn" caused by a shortage in supply.
For now, however, exceptionally low interest rates are attracting some buyers, with the growth in demand particularly strong amongst buy-to-let investors and cheaper properties. However, UK unemployment is still over 2.4 million and, despite a small fall, the outlook for jobs is not all positive. Even if the UK economy maintains its faltering signs of growth in Q1 2010, this can only keep the pressure on a still-fragile market.
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The British Bankers’ Association (BBA) November release announced that the number of mortgage approvals for house purchase was holding up and were back to similar levels of two years ago. However, the average value of those mortgages remained slightly lower than 2007 and remortgages are virtually non-existent as existing borrowers revert to low variable rates when their mortgage deals end. Ernst & Young’s Item Club expects the UK housing market to get worse before it gets better as tight credit conditions linger, warning that current signs of recovery are a "false dawn" caused by a shortage in supply.
For now, however, exceptionally low interest rates are attracting some buyers, with the growth in demand particularly strong amongst buy-to-let investors and cheaper properties. However, UK unemployment is still over 2.4 million and, despite a small fall, the outlook for jobs is not all positive. Even if the UK economy maintains its faltering signs of growth in Q1 2010, this can only keep the pressure on a still-fragile market.
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