Market Outlook – 12 June 2009
More 'green shoots' of recovery have been appearing over recent weeks both here and in America. Indeed one respected independent institution went so far as to say that the UK economy actually grew in April and May. Both the (very reliable) purchasing managers' index and industrial production have shown an upturn, however this may reflect a reversal of the inventory destocking of the last six months and may not be sustainable. The US equity market has made further headway in the last month despite the (admittedly long expected) bankruptcy of General Motors, while the FTSE-100 has traded sideways in the 4,350 – 4,500 range. The 25% rise from the March low probably discounted the better news we are now seeing and the market is now waiting to see how events unfold.

It would be idle to deny that there are still considerable headwinds. The weakness of the dollar, combined with the sharp rise in the yield on the US 10 year bond to 3.9%, could reflect increasing reluctance on the part of international investors to go on funding America's huge government deficit. If the US has to resort to quantitative easing on an even larger scale, the dollar could suffer further falls. In the UK the 10-year gilt yield has risen from 3.5% to 3.9% over the past month. Much of our quantitative easing has apparently gone overseas (ie. foreign investors rather than domestic ones have sold bonds to the Bank of England) thus defeating the object of the exercise, which is to inject money into the UK economy. Although the pound has been strong, there remain concerns over the Government’s ability to finance its huge deficit, and Standard & Poor' has raised the possibility that Britain’s AAA credit rating may have to be downgraded if government spending is not cut back, which this government shows no sign of doing. Finally, the oil price has now nearly doubled to around $70 a barrel, a trend which if it continues will slow the recovery.

Overall, we are optimistic that the economic recovery will gather speed as we move towards and through 2010. We are reassured that the equity bear market is now over. Although stock markets may continue to mark time for some weeks yet, we are confident they will move higher in due course and a new bull market is on the horizon. In the UK the market still trades on a trailing yield of 4.4% and PE ratio of around 10. True, there will be further dividend cuts and earnings downgrades, but if the recovery continues many cyclical companies will resume dividend payments and earnings will start to recover. Markets are always looking six to twelve months ahead. We have increased our equity weightings and continue to favour investment grade corporate bond funds, which offer handsome yields and have been achieving capital growth as well. We are overweight major oil and mining stocks which are performing strongly, and seeking out recovery stocks in the retail and consumer sectors which offer good yields on sustainable dividends.

Reproduced with permission from Miles Moseley, Managing Director of Capel Court PLC