Investment Market Update - August 2011


Our latest assessment of the growing concerns about global economic growth and the ongoing issues in the Eurozone which led to extreme volatility on stcokmarkets across the world through the end of July into August 2011....

Investment Market Update – August 2011

One week in August….
Growing concerns about global economic growth, ongoing issues in the Eurozone, worries about 0% GDP growth in the second quarter for France and the possible downgrade of its debt plus the unsafe condition of its banks, the US credit rating cut for the first time, civil unrest and riots in the UK, the most volatile day in the history of the London Stock Exchange with 1.5m trades and more than 2.8bn shares changing hands. Hard to believe that all of this happened in such a short period of time in August when traditionally we like to imagine soaring temperatures, holidays and a general feel good factor throughout the country.

We thought 2011 was going to be a tough year and the avalanche of poor news has demonstrated very vividly that it’s tough out there and that there is likely to be more pain to come. Inevitably, the short term impact has been exceptional volatility in global stockmarkets and fears, fuelled by the media, of a return to the crisis of 2008.

Although 2010 saw the beginning of the sovereign debt issues, the prospect of a US led recovery helped markets begin 2011 with a steady upward curve that lasted until March when the tsunami in Japan shook the world. With Japan being such a vital component in the global supply chain, optimism soon turned to pessimism which continued throughout spring into the summer. As we moved into July, unease in the US began to catch the headlines with the release of very poor economic data followed sharply by the politicians failing to agree on an increase in their borrowing threshold and creating an environment where America’s ability to manage its finances is less predictable and stable. The debt issues were problem enough without the world having to witness a less than statesman like spectacle that has served only to increase US political risk.

All of this, coupled with the ongoing sovereign debt crisis in the Eurozone, led to a fall in market confidence in the policymakers’ ability to tackle the debt and economic growth issues effectively. The result was a significant fall in global investment markets. 

The bigger picture….
It would be very easy for investors to be swept along in the hysteria but it is important at times like these to cut through the short term noise and look at the bigger picture.

Firstly, it is important to remember that recent events have their roots in the credit crisis which started in 2007. We have known about the sovereign debt problem for years now – it is not a new issue - but the passage of time has enticed many to think that the associated problems have passed when the reality is that the credit crisis is still going on. All that has happened is that the cause – the bad debts - has been moved from the financial institutions to governments. This remains the fundamental issue and has a profound impact on global growth. Until a long term solution is agreed, it will continue to create uncertainty in markets and volatility for investors.

So far, this has not happened and heads of government and central banks have headed for the sun facing a barrage of criticism from economists and investment professionals at their inability to cause a more level headed assessment of the outlook. Despite no shortage of warning signs, governments have failed to get to grips with the mounting challenge of low growth and rising debt. If a concerted policy response is not delivered imminently on both sides of the Atlantic, the risk grows that poor investor sentiment will continue to drive markets down and major investors, such as China, might be reluctant to buy any level of sovereign debt preferring to put their money in hard assets such as commodities, agricultural land and mines.

In Europe, last week’s decision by the European Central Bank (ECB) to buy the debt of Spain and Italy is an early sign of positive intent and has helped to bring a little stability, but it also throws up some interesting questions as it moves the ECB much closer to the politicians, something that it has sought to avoid in the past. As we write, there are reports that “crunch meetings will be held in the coming week to consider an initiative, driven by France, to issue new eurobonds, backed by all member nations. These bonds could be used to refinance the individual debts issued by the problem countries of Greece, Ireland, Portugal, Italy, Spain and any other member that becomes the subject of market speculation as has been the case with France over the last few days.

What next for investors?
Although the underlying issues within the global economies are a concern, we do not believe that it is a time to panic. The sovereign debt issues are not ‘new news’ and the loss of its AAA rating by the US was hardly a surprise given the pre-notice provided by the rating agency. In fact, little has fundamentally changed in the economic environment over the past week or so – the problems have simply come into sharper focus - but what has been affected is confidence and this has again highlighted the overriding need for clear, decisive action by governments.

The overriding message from the fund managers’ camp is that they see this period as a buying opportunity and not a time to sell. Generally, the current correction is viewed as indiscriminate, impacting all types of shares irrespective of their underlying dynamics. In broad terms, this means that there are numerous companies out there who have seen millions of pounds wiped off their share price at a time when they are maintaining strong balance sheets, sound earnings stability and with the potential to sustain healthy dividend growth going forward.

As always, we stand by our long term investment philosophy and do not intend to try to second guess short-term market movements. Investor sentiment could remain downbeat for some time yet and there is, of course, the potential for more volatility and further market falls. However, we do believe that the events of the last week or so will provide an important stimulus to the already crisis-hardened authorities who will move to avert the worst case scenarios that receive so much media attention.

In the meantime, we consider our investment portfolios to be well-positioned for our clients and that our investment process will allow you to benefit from market growth over the long run. For these reasons, we are not recommending any changes at this time.

In summary….
In summary, we do understand and appreciate that the current exceptional circumstances within global financial markets make it a difficult time for investors. However, we firmly believe that, even during these difficult times, maintaining a disciplined approach will bring long term rewards.

We are no more concerned now than we were before this latest period of volatility in terms of our medium to long term outlook and we remain satisfied that the core fundamentals that drive medium to long term capital growth remain in place. However, event driven volatility will continue to remind us of the difficult environment we are in and which is likely to persist for some time yet.

As always, we understand that our assessment can only provide a broad overview of the current situation and it is important that your own circumstances and requirements are considered. With that in mind, please do not hesitate to get in touch if you have any questions or would like to discuss your financial planning requirements in more detail.

Chilli Financial Limited is an independent financial adviser directly authorised and regulated by the Financial Services Authority. We are committed to providing a highly professional service to help all of our clients to meet their financial objectives, both business and personal. We have produced this newsletter as part of this service, but it is intended only as a guide in highlighting general issues which may be of interest to our clients. It is not a substitute for full professional advice and specialist assistance should be sought in relation to any particular circumstances. Accordingly, no responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by Chilli Financial Limited. The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance is not necessarily a guide to future performance. Funds investing in overseas securities are exposed to and can hold currencies other than sterling. As a result, exchange rate movements may cause the value of investments to decrease or increase. All statements relating to taxation are based upon our understanding of the law and HM Revenue & Customs practice in force at the date of this report. There can be no guarantee that the tax position at the time investments are made will endure indefinitely.

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