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