Market Outlook – 17 May 2010
There are times when a month can seem like a year. In the past month we have seen Greece nearly go bankrupt (its debt was downgraded to junk status and the yield shot up in a few days from less than 7% to 12.7%). The contagion spread to Portuguese and Spanish Government debt (also downgraded) and the Euro wilted under the strain. Euro zone Governments were slow to react, but finally, fearing that a default would imperil the European banking system and the Euro, came up (in conjunction with the IMF) with a 750 billion euro support plan. This will buy time, but not solve the basic problem of the Club-Med countries, which will have to deflate their economies if their voters will allow them to. At least for the moment, the crisis is over and the markets can breathe again.

Meanwhile, the UK has been anxiously witnessing a tight election battle which has now led to a Con-Lib coalition. Our equity market drifted lower over the month and the FTSE-100 hit a closing low of 5,123 on Friday 7 May, after a chaotic day’s trading on Wall Street which saw the Dow down nearly 1,000 points at one stage and the panic in Europe reach its climax. The European rescue plan for Club-Med and the arrival of a stable Government in the UK dedicated to an early reduction in the huge public deficit has stabilised markets and the FTSE-100 has recovered to circa 5,275. The panic in European debt markets created a rush into German Bunds, UK Gilts and US Treasuries and the yield on the 10-year Gilt is down over the month from 4.06% to 3.85%. The pound has weakened against the dollar but strengthened against the euro, a trend which we expect to continue.

Sentiment is bound to remain tender in the weeks ahead awaiting the new Government’s emergency budget, and may remain so if the Unions resist the measures likely to be contained in it. But amidst all this gloom it is easy to lose sight of some brighter features in the economic landscape. The world economy is staging a strong recovery which is already benefiting America and should help to offset deflationary forces in Europe. Initial estimates of Q1 growth in the UK were 0.2%, but very strong industrial production indicators for March make an upgrade very likely when the final figure is released and, with exports picking up strongly, higher numbers could be achieved later in the year. For the moment we expect the FTSE-100 to trade between the April high of 5,825 and the recent low of 5,123. Corporate profits are recovering strongly and if by the autumn the deficit reduction programme is proceeding to the satisfaction of the markets and without too much labour unrest, we still expect the FTSE-100 to trade up to 6,000 by the year end.

Within the market we continue to overweight the big international stocks which are an investment in the world economy and we retain our mining exposure despite the Australian Government’s proposal to impose a 40% super tax on some of them. We are looking to increase holdings of exporters and stocks offering high and secure yields, which now include some oversold utilities. We still don’t like Gilts or commercial property and we have now turned neutral on investment-grade corporate debt.

Reproduced with permission from Miles Moseley of Balkerne Asset Management