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Market Bulletin

MONDAY 13 SEPTEMBER 2010


Tel: 01437 766396
Email: mark.burch@sjpp.co.uk
Website: www.burchwealthmanagement.co.uk

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This weekly Briefing Note aims to pick out some of the risk taking and greater potential for catastrophe. In the
key financial and economic issues touched on in the current environment of increased corporate governance and
press over recent days and from time to time includes governmental regulation, it is unlikely that Barclays will be
the views of some of our independent fund managers. led to meltdown by an optimistic doer who has experience
of building a global brand.
Markets shake off uncertainty

Last week saw a general rise in global markets, with the


UK FTSE 100 achieving levels not seen for over four Cutters vs. Spenders
months. However, the overall gains masked continuing
uncertainties, as financials and energy stocks ‘see- With the back drop of governmental austerity measures
sawed’ throughout the week. Whilst the Bank of being indirectly linked to the Connaught decline the
England Monetary Policy Committee’s decision to argument between the ‘cutters’ and ‘spenders’ continues, as
maintain interest rates and quantitative easing at current reported by The Financial Times, both in the UK and in
levels was widely expected, the rapid and spectacular the US.
crash of Connaught, the building and support services
firm, provided a stark reminder of the harshness of the The argument against austerity measures has been recently
current environment. joined by Ed Balls, Labour Party leader nominee. He
argues that, with a credible economic alternative to the
Connaught went from a stock market value of £626m to expected measures, the aggressive cuts could be avoided
bust in just three and a half months. A lack of clarity and the rug not pulled from under the fledgling recovery.
around the company’s reporting and true financial Balls went as far as to suggest that the Government’s
situation compounded by their reliance on local council approach to spending is “economically misguided and
spending, which is expected to be severely limited by dangerous”. However, what this fails to recognise is that
governmental austerity measures, led to a run by the Coalition inherited a policy of fiscal tightening which
creditors, finally resulting in Connaught running out of they have simply accelerated in order to complete it, so that
cash. None of the St. James’s Place funds had holdings it does not spill into a new parliament. The short term aim
in the company. was to reassure markets and regain fiscal credibility for the
UK. The current low gilt yields would seem to reflect, at
In the financials arena, the announcement of Bob least in part, the confidence instilled by the announced
Diamond as the new chief executive of Barclays Group measures, although the spenders will say that they indicate
prompted mixed reaction, somewhat surprisingly given no crisis in the public finances.
his track record. This is a man who has been
responsible for the development of Barclays Capital In the US, it would seem that President Obama and his
into a global financial colossus in just 13 years. His regime fall squarely into the camp of ‘spenders’. His new
track record alone should have dispelled any fears. proposals, which include $50bn of extra spending on
However, as an investment banker, he is regarded with infrastructure, expanded tax credits and relaxed rules on
suspicion by some shareholders and investors, who corporate investment write-offs, would all seem to offer
suspect his entrepreneurialism will lead to increased boosts to corporate U.S.A. However, it is highly likely
they will be rejected or diluted. The current US fragility of the economic recovery, particularly in the
stimulus package sits at $1 trillion and seems to have United States. In our mind, the data is inconclusive. On the
been largely ineffective, so what will an extra £50bn one hand, it is perfectly consistent with historic precedents
achieve? Whilst tax incentives may seem attractive, it that the rate of expansion should slow in the second year of
is highly likely they will be replaced by other taxes. recovery. On the other, the removal of stimulus and the
Many see the proposals as purely electioneering to try need to reduce excess leverage understandably raises
and stave off the march of Republican candidates in the questions as to what the new normalised level of aggregate
mid-term elections in 50 days’ time. demand really is.

The Federal Reserve Board’s business survey’s noted A good illustration of the uncertainty surrounding the
“widespread signs of deceleration (in growth) compared economic outlook is US employment data. In August,
with preceding periods” are currently offset by private employment grew by only 71,000 and the previous
increased consumer spending activity and a reduced month’s report was revised sharply lower, but the
trade gap. However, consumer and trading confidence workweek continued to expand and hourly earnings also
may take a knock if government policy is further rose. On balance, we believe the evidence points to a mid-
clouded by political infighting. cycle slowdown rather than a prelude to a double-dip
recession and are comforted by the vigilance of financial
What cannot be denied is that the banks continue to authorities globally. One particular illustration is the
hoard funds. Unless the financial institutions begin to Federal Reserve’s announcement that principal payments
lend more widely at reasonable terms, any further from its agency and Mortgage Backed Securities holdings
easing will simply improve the balance sheets of many would be reinvested into longer-term Treasuries in a move
banks. designed to bolster growth and prevent the US economy
from lapsing into recession.
End of Year Stock market predictions encourage
Within the fund, we modestly reduced the net exposure (the
Encouragingly, The Sunday Times reported that City value of our long positions less the value of our short
analysts are predicting a 10% share price rally by the positions) of the Fund over the month but our gross
end of the year. Although UBS downgraded their FTSE exposure (the combination of our long and short positions)
100 forecast for the year end from 6250, they still remains high, reflecting the conviction we have in a
targeted 6,000. This aligned with Citigroup, whilst number of different stock positions. We remain positively
Morgan Stanley upgraded forecasts from a rather exposed towards the beneficiaries of increasing corporate
pessimistic 5,000 to 5,800. discretionary expenditure and further healing of funding
markets, but are more cautious on areas of the economy
Expectation will be buoyed by improving US trade that remain over leveraged”.
deficit data and a reducing number of unemployment
benefit claimants in both the UK and US. At the same Considering alternative investments
time, the Organisation for Economic Co-operation and
Development (OECD) said Britain would be the fastest- With the uncertainty felt by many and the average easy-
growing economy in the G7 group of industrialised access account paying “a measly 0.77%” (The Sunday
nations in the third quarter of this year. Telegraph – source: Moneyfacts), The Sunday Times
considered alternative investments.
Recent profit reports from a large number of big
businesses have also boosted confidence. However, it They reported that thousands of savers who invested in
cannot be ignored that a large proportion of these profits products claiming to offer stock market returns without
have come from cost cutting and streamlining in flat risks are finding that they are maturing and paying little
markets. more, or even less, than they would have got from cash on
deposit.
So which areas might lead the charge? Two possible
opportunities highlighted, which are pursued by a Protected or structured products, which accounted for
number of managers of St. James’s Place funds, were £13.9bn in investment in 2009, have been maturing this
banks and companies from developed economies with summer and many are only repaying the original capital
exposure to emerging markets. invested. 5 year plans maturing this year have seen no
stockmarket growth versus a rise in the retail prices index
Lloyds Banking Group led the FTSE rally last week of 16.6% in the same period (July 2005 to July 2010).
after several analysts updated their outlook for the Concerns were also raised over the ability to exit early if
stock, noting a number of UK domestic banks still offer conditions were unfavourable and the penalties for doing
long term value. so. Shorter term products also came in for criticism.

With the wealth of conflicting comment, policy and The Sunday Times also carried an extensive article on the
data we asked Mark Lyttleton, co-manager of the rush by many fund managers to launch bond funds,
St. James’s Place UK Absolute Return funds, which can focussing on those offering a higher income or yield.
take advantage of both falling and rising share prices, to Yields on traditional bond funds have been falling as
comment. “Equity markets globally were weak last institutional and private investors have moved into this
month as investors continued to wrestle with the area, as evidenced by the Investment Management
Association’s data indicating the fixed income sector payments to investors or repay the loan. The investor can
was the best selling in July. call upon tangible assets such as property, machinery or
even intellectual property rights in lieu of the debt. In this
It was interesting to note that whilst the article outlined way the investor may recoup a greater proportion of their
high yield bonds, and funds investing into them, which investment in the event of a default.
offer higher potential returns but with bigger risks, no
mention was made of Senior Secured Debt (SSD).
These bonds seek to offer an alternative route to
recovery if the company cannot maintain their interest
The St. James’s Place Wealth Management Group provides wealth management services.
Members of the St. James’s Place Wealth Management Group are authorised and regulated by the Financial Services Authority.
The St. James’s Place Partnership and the title ‘Partner’ are the marketing terms used to describe the representatives of the St. James’s Place Wealth Management Group.
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