Economic and Market Review
Key points for November 2008
Volatile month
UK interest rates cut by 1.5%
PBR raises national debt to £1 trillion
Government bond yields at record levels
US helps to ease mortgage rates and ABS market
Global Commentary
G7 equity markets rose substantially by month-end, but the only asset class to have benefited from the uncertainty was government bonds, pushing down yields to record levels. The US rescue of Citigroup was well received, helping financials recover, whilst the Federal Reserve’s effort to ease pressure on mortgage rates, through a $800bn liquidity facility, was also welcomed.
UK
November ended with a tenor of optimism, despite having been another torrid month for equity investors. The month started with a 1.5% interest rate cut from the Bank of England. This move was met with mixed emotions as investors oscillated between relief and then anxiety about the degree of economic deterioration. The cut was also followed by a dovish inflation report in which the Bank implied that more monetary stimuli were needed to lift the economy. The Pre-Budget Report offered up a dose of fiscal stimuli, dragging borrowing up to £118 billion next year, and increasing the national debt burden to £1 trillion.
Investment Outlook
We believe worries about deflation will continue to dominate investors’ thinking in the short term, and could place bond yields under further downward pressure. However, the extent of monetary and fiscal stimuli should result in inflationary pressures building in the longer term. Most of the current weakness is being driven by the deleveraging process, which appears to be drawing to a close; however, this does not signal an end to the weakness in the market as investors worry about corporate earnings and real income in 2009. Whilst a poor economic backdrop continues to damage confidence, we anticipate interest rates in the UK to hit 1%-1.5% in 2009.
Finally, when volatility levels are high, investors tend to shorten their time horizons and build in overly-pessimistic scenarios. Risk remains very high at the moment, but recent research in the UK market alone does highlight some extraordinary value.
Julian Chillingworth
Chief Investment Officer