Market Commentary
Economic and Market Review
Key points for January 2010
UK
Investors returned to the market in a bullish mood, with the first few days of the month seeing the market turn aggressively higher. However, mixed economic news led to volatility later. The UK stumbled out of recession, or so the stats would have us believe; however, most indicators suggest that the economy is still struggling. The inflation rate jumped the most in at least 12 years as CPI inflation climbed 2.9%, year-on-year, versus 1.9% for November. Over January, the FTSE 100 index returned -4.09%; the FTSE 250 -0.65%; the FTSE 350 -3.68% and the FTSE All-Share -3.57%. Sector-wise, the miners, retailers and financials all suffered.
In bonds, exceptional levels of demand pushed the corporate bond rally into 2010. Yields across the board fell back to pre-Lehman levels as brokers’ inventories wore thin. Investment grade and supra-national paper traded close to Gilts, and the Bank of England took the opportunity to instigate a reverse auction (its first sale of corporate bonds). Prior to the auction, the Bank of England held £1.55 billion of corporate bond paper. In one auction alone, it received bids totalling some £1.19 billion, although accepted bids were much less.
Global Commentary
Investors’ love of risk continued into January, but it lost momentum when China raised its reserve rate, and the US made noises about ‘normalising’ funding. This uncertainty was supportive of sovereign debt, although the latter ran into bother as ratings agencies continued to fire warnings over the extent of deficits. US Treasuries benefited from the flight to quality, supporting the Dollar versus the Euro and Sterling. Over the course of the month, the US returned -3.5%; Eurozone –5.3%; emerging markets were -4.4%, but Japan bucked the trend, up 0.8%.
Investment Outlook
Following recent machinations in Europe, short-term market rises remain on tentative ground. Deep structural weaknesses, and perhaps even policy errors, have been exposed, and there are too many agenda to warrant a sweet antidote. There are bets on both red and black; big bets that have the power to induce some queasy market gyrations. The chances are that Greece will receive support to prop it up and avert default; however, longer-term, those countries that have deviated from the stability pact must be brought into line, increase their competitive advantage, or risk the credibility of the Euro again. A debate about the post-crisis world has been thrown wide open. What is certain is that the consequences of a currency rout at this juncture would be disastrous amid the imbalances that already exist. The nature of exit strategies has also been called into question – this remains the biggest risk that investors face in 2010.
Julian Chillingworth
Chief Investment Officer