Investment Market Update - October 2010




After the crash....

In our ‘Investment Market Update’ of July 2009, we thought the worst of the investment cycle that had caused so much volatility since 2007 was possibly over and, thankfully, that assessment has proved correct. Markets have rallied and investors who followed our advice to maintain a long term approach have been rewarded. 

The FTSE 100 ended July 2009 at 4,608 points and the outlook remained uncertain. Over the following 12 months it stabilised and for some weeks now it has hovered around the 5,500 point mark despite the continuing economic uncertainty. 

The Fixed Interest sector has provided strong returns that have been well above historical norms. The corporate bond market has been one of the few beneficiaries from the ‘credit crunch’ and gilts (UK government securities) have increased in popularity as problems in the eurozone have intensified.

Commercial property has experienced a strong recovery after the significant falls in valuations through 2007/08 and our recommended funds have, frankly, performed better than we expected. We are yet to be convinced that this is sustainable, certainly at the growth levels seen over the last 12 months (unit prices have grown by over 20%), and economic uncertainty is likely to hamper progress in the short term.        

Overall though, there is an enduring feeling of ‘one step forward and one step back’ in the financial world as every positive movement is met with intensified fears of a contraction in growth that might lead to another recessionary period.  

What next....

The possibility of a ‘double dip’ recession is a major talking point at the moment and the outcome of the Government’s ‘spending review’ which will be announced on 20 October is eagerly awaited. Market reaction should give us a clear indication of the likely direction of asset prices over the next period.

In our opinion, the Bank of England will attempt to avoid this ‘double dip’ scenario by agreeing to another bout of Quantitative Easing.  This should create short term liquidity and might devalue sterling sufficiently to increase exports, but it is unlikely to be enough to avoid us falling into another recession as growth forecasts continue to be revised down. This should help counter any elongated periods of negative growth, maintain already sparse liquidity levels and, of course, keep the financial wheels turning.   

A cautious glance to the housing market for some good tidings only serves to compound already poor sentiment as the short to medium term outlook remains fragile.   

The Expert View....

As you will know from previous communications, we conduct significant research as part of our investment review process. This involves regular meetings with some of the top UK investment fund managers and, over the last few weeks, we have been fortunate to meet with two leading figures.  

First up was Ian Spreadbury who has over 30 years experience in the industry and currently manages over US$7bn of Fixed Income funds for Fidelity. Ian’s view is that, despite the headline figures, we are heading for a slow growth/low inflationary period which will take the pressure off the Bank of England to increase interest rates and provide further support for corporate and government bonds. However, he sees a real risk that we will experience a ‘double dip’ recession and that economies will remain fragile for some time as a result of the debt overhang, rising sovereign risk and the increasing possibility that there may be a country default (e.g. Greece, Ireland) on debt repayment unless the terms of ongoing support are revised. Clearly, there are some real challenges ahead for the European Community.  

A slightly different view came from Richard Buxton, Head of UK Equities at Schroder, who has gone on record saying that he believes that the FTSE 100 will gain 20% throughout 2011.  Whilst acknowledging the economic issues and uncertainties, Buxton is ‘bullish’ about the prospects for 2011, partly because he thinks equity markets are already pricing in a harsh double dip recession.

In summary....

As always, we have to put things into context.  Whilst it is clear that volatility in global stockmarkets will remain for some time, the fundamentals that drive long term investment growth are improving steadily.  Corporate earnings are ahead of analysts’ forecasts as companies work hard to reduce debt and strengthen their balance sheets.  This has led to a healthy increase in merger and acquisition activity which shows that some confidence is returning. 

We have highlighted in this update various areas of concern which could cause further headwinds over the coming months. Critical amongst these is the real risk that the UK economy might fall into another recessionary period. 

However, in our opinion, investment markets have already factored this risk in and the anticipated impact of the ‘double-dip’ are reflected in current asset valuations/prices.  Our assessment is that we are now at the stage in the investment cycle where there should be the potential for good growth over the next 2 – 3 years.     

For all of these reasons, we remain optimistic that a balanced and structured investment approach can provide attractive returns going forward, particularly over the longer term.  As always, we recognise the importance of each individual’s circumstances and would encourage you to get in touch if you have any questions or concerns.   

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 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 guarantee that the tax position at the time investments are made will endure indefinitely


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