Market Update: July 2010
The bond markets appear happy now about the state of Britain's finances but it is the turn of equity markets to get a little nervous.
Bond markets, rating agencies, and specifically, the institutions which lend to the British government seem more than satisfied with the programme of cuts laid out in Chancellor George Osborne's Budget.
This means it is much less likely that the UK will suffer any contagion as a result other European countries' debt problems or a ratings downgrade that would make paying back the national debt more expensive. We are hopefully now very far from the worst case scenario of having to ask the IMF for help.
Faith also appears to have been restored in sterling which has strengthened recently against the dollar to around $1.52 and slightly less steadily against the euro to around euro 1.20.
John Freeme of currency exchange specialist HiFX says the firm's house view is that 1.25 euros is possible in the medium term and they expect a range of 1.47 to 1.525 against the dollar.*
Opinion divides on the wisdom of such a large deficit reduction programme and its precise nature with roughly 80% to come from spending cuts and the remainder from tax rises. These taxes include capital gains tax which has risen from 18% to 28% for higher rate tax payers and a 2.5% rise in VAT for everyone from January 4th 2011.
Some sectors are worried about tax increases and cuts and a Deloitte survey of finance directors shows two thirds are concerned about the cuts' impact on their businesses at least in the short term.**
The FTSE 100 has been trending down for most of June and the start of July falling to 4823.5 by July 5. The index was above 5800 in April and has seen a great deal of volatility in the last quarter. The reasons for the volatility range from BP's travails, concerns about Greek and other southern European countries' debts and the impact on the wider economy, some signs of weakness in China's recovery, fears about UK banks' ability to sell on 'toxic' assets as well as the effect of the budget cuts.
However at least when it comes to the cuts, fund managers feel the private sector should take up the slack in terms of generating jobs. They expect more volatility short term but are reasonably optimistic medium term though, they say, growth will be sluggish in the next couple of years.
Schroders head of UK equities, Richard Buxton, points out company balance sheets are in good shape, earnings forecasts have risen and companies have excess cash while interest rates remain low.
He believes many firms such as those with exposure to better performing emerging markets will do well while high street brands such as Next are priced on the basis of a very gloomy assessment of the next three years when well run firms should do well.
He says: "Crucially, we are not expecting the economy to simply roll over into a double-dip recession or, in other words, enter an extended period of significant contraction. It’s clearly going to be an eventful summer, but that doesn’t mean you should turn your back on stocks." ***
So, if you would like advice on your current investments or would like to review your portfolio I would be more than happy to help - please do not hesitate to give me a call.
Independent Financial Adviser
Note: The information and opinions contained in this commentary are correct as at 5th July 2010 and are subject to change.