Is There Any Good News Out There?

02.06.10

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To say that markets have been volatile over recent weeks is a bit of an understatement, with equities coming under selling pressure throughout May. Share prices fell enough to be officially in ?c

To say that markets have been volatile over recent weeks is a bit of an understatement, with equities coming under selling pressure throughout May. Share prices fell enough to be officially in ?correction? territory and we cannot rule out further short-term falls. The markets have been driven by fear and uncertainty – but although it is unsettling, it is normal to have corrections in a bull market. This can last from a couple of weeks to few months, but does not usually disrupt the longer-term upward trend. In the past bull markets have not retired this early and second years following a major bear market bottom are generally positive.

This does not however mean that the road will be smooth ? bull markets do not run smoothly, particularly when the economic recovery is so tentative ? so it is important to keep focused on your long-term investment objectives.

There is no denying that there has been a lot of bad news around, from the financial troubles in the Eurozone, to the German ban on short selling, to geopolitical concerns over North and South Korea. However, with much of the media focusing on the more dramatic ?doom and gloom? stories, you?d be forgiven for thinking that there is only bad news out there, which is not the case.

US consumer confidence increased for the third consecutive month in May, reaching its highest level in over two years. Consumers account for over two-thirds of US economic growth.

The UK economy grew faster than first estimated over the first quarter of 2010, at 0.3%. The Eurozone also posted moderate but positive growth of 0.2%, ahead of expectations and improving on the 0% of the previous quarter.

While overall Eurozone growth may suffer marginally from problems in the ?periphery? countries, Germany and France ? which make up half the Eurozone economy – are fundamentally strong.

Although one of the big fears driving the market is that of debt amongst the so called ?PIIGS?, they are actually still managing to auction debt. In the third week of May for example, Portugal and Spain sold 10-year bonds at oversubscribed auctions at yields of 4.05% and 4.52% respectively. Ireland sold ?1.5 billion of bonds with demand outstripping supply. With the willingness to buy these sovereign issues, contagion is not a foregone conclusion.

On 26th May, the Organisation for Economic Co-Operation and Development (OECD) released its twice yearly Economic Outlook and encouragingly raised its forecast for global growth to 4.6% in 2010 and 4.5% in 2011 (up from 3.4% for 2010 and 3.7% for 2011, as forecasted in November).

It expects the US economy to grow by 3.2% this year and next and the Eurozone to advance 1.2%, compared to its previous forecast of 0.9%. Japan?s economy will expand 3% instead of 1.8%. Emerging economies will achieve a much faster pace of growth: China is expected to expand over 11% this year; India 8.3% and Brazil 6.5%.

In an interview with Reuters, OECD chief economist, Pier Carlo Padoan, said that recession in the Eurozone is unlikely, and that the decline in the Euro ? ?a welcome development? – should help offset the effect of debt shrinking austerity measures on economic growth. Even if austerity hits growth, it would be partly offset by Asian-led demand for Eurozone exports, made more competitive by the lower exchange rate.

This echoed views by James Bullard, Federal Reserve Bank of St Louis President who, speaking at London?s European Economics and Financial Centre on 25th May, said that the Europe crisis will probably ?fall short of becoming a global recessionary shock?.

?Sovereign debt crises have been with us for many, many years. There is nothing intrinsic about such crises that they need to become important shocks for the broader, global macroeconomy.?

He pointed out that the European financial rescue package buys substantial time for governments to enact fiscal retrenchment programmes, and that it will take time for them to be enacted and to gain credibility with financial markets.

It is impossible to predict with any certainty to what extent the bad news will weigh on share prices and how long for. We can?t definitely say that the market will follow the same pattern as following previous bear markets. We will probably see swings both up and down in the short-term. It is however interesting to note that experts say that shares are now as cheap relative to gilts as they were in 2003 and 2008 – and markets rallied strongly on both occasions.

A sound investing strategy needs to be forward looking and fact driven. Too often investors respond to short term market moves, and as result buy at the top of the market and sell at the bottom. The risk of selling after markets have fallen is that you will miss out on the upswing and take longer to recover your losses.

Although volatility can test our nerves, investors should remember they are invested for the long-term and not to avoid a few weeks of volatility. If you have a tailored strategy in place and your portfolio is reviewed regularly to keep it balanced to your risk tolerance and objectives, you should probably just sit tight through the current uncertainty.

If your portfolio has not been professionally reviewed for some time, ask an experienced wealth manger like Blevins Franks Financial Management Limited to assess your holdings to see if you are overexposed to any asset class. It is important to have adequate diversification and get the balance right for your circumstances.

By Bill Blevins, Managing Director, Blevins Franks

31st May 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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