The dilemma that markets face causes fear on some days and optimism on others – and until one mood triumphs we are unlikely to see a clear direction.

On the negative side we have the end of quantitative easing and the consequent cessation of the liquidity which had so restored markets. Equally various national Governments are also being seen to have shaky finances and possible difficulties in borrowing what they need to pay the bills. Much as many would like the banks to reimburse ‘the taxpayer’, President Obama’s promise of a 10 year levy also weakened sentiment.

On the positive side is the continuing strength of corporate earnings. Naturally the end of a recession will see companies re-stocking which will explain an initial ‘bounce’ but, in the USA alone in the fourth quarter 2009 revenue grew by 3.5% across all sectors. That demonstrates the recovery that is going on at company level.

So, Governments are struggling to meet their bills (which is bad news for taxpayers) and companies are broadly doing well (which should be good news for investors).

Concerns about Government finances will cause volatility in all markets probably through 2010 but there are plenty of equities offering both growth and a good yield that are worth tucking away for the long term.

Author: Graham Barnes, International Director

Investment Highlights
• US monthly market fall the largest since February 2009
• President Obama proposes measures to restrict banks’ operations and ensure they repay money loaned by the government
• Eurozone unemployment hits 10%
• German economy shrinks by 5% in 2009
• UK exits recession – but only just
• Inflation rises above Bank of England target
• Fourth quarter GDP in China hit 10.7% year-on-year, leaving full year GDP growth at 8.7% in 2009
• Policy tightening began in China and India where banks’ reserve requirements were increased
• Japan’s exports turned positive in December for the first time in 15 months
• Greek government bonds continue to weaken as concerns about public finances persist

With January behind us, we can sensibly discuss how global markets should expect to perform in 2010.

Firstly, the US housing market (where all the recent problems began) is improving.  The recovery from recession is likely to exceed forecasts although developed nation’s banks need to increase lending to business.  The problem is that those banks have had an expensive reminder on the dangers of leverage and are re-building their balance sheets.

The ray of sunshine has been emerging markets.  As remarked in earlier notes, these markets have few problems in common with Western economies.  2009 saw terrific growth in most EM markets which was welcome but leads to two current doubts.  First, that the whole world is now very dependent on emerging markets for growth and, second, they are unlikely to grow at that rate indefinitely.

In bond markets, corporate bonds have given their best.  Values remain reasonable offering investors attractive yields whilst UK government bonds are unattractive.  For the Government to find an extra £170 billion in 2010 higher rates of interest might have to be offered to investors which will impact prices.

Equities in most markets are now at sensible valuation levels after the recovery in 2009.  With the exception of the financial sector, corporate profits are rising, making shares attractive for those investors seeking income or steady growth.

Currency markets should see a change in the fortunes of both the US Dollar and the pound.  After a grim 12 months, both now look ‘cheap’, and should recover although worries about Government debt funding will cause concerns.  The yen now seems expensive.

Of course, there will be risks.  If Western governments cause interest rates to rise too quickly growth could be choked off.  Meantime, equity and bond markets offer good prospects especially for those investors facing low cash returns.

The Fry Group entrusts responsibility of the management of client investment to a number of reputable firms.  These comments are taken from presentations by Investec and Rensburg Sheppards given to Fry clients in London on 21st January 2010.

Author: Graham Barnes, International Director

Investment Highlights

• US markets rise, with riskier assets rebounding from November’s flight to quality
• Citigroup and Wells Fargo raise funds to exit TARP
• Euro loses 4.5% against US dollar during December 2009
• Eurozone CPI rises to 0.9%, a 10 month high
• UK equities end December 2009 higher
• In UK the Pre-Budget Report dominates headlines including bankers tax
• Japan GDP revised down from 4.8% to 1.3% growth
• A record year for global emerging market equities, led by Brazil, Russia and India
• Greek government debt downgraded
• Government bond yields rise

The UK is suffering on two fronts as December, and 2009, draws to a close.  The snowy conditions are achieving the usual disruption to transport but those problems will ease once the wind shifts to the west and the rain starts again.  A greater problem lies in the UK economy where the UK Chancellor has decided to delay reducing the Nation’s outgoings in the hope of buying popularity in the 2010 election.

I sense that, weather and chancellors apart, the UK has a more cheerful mindset than just 12 months ago.  That is not too surprising though as stock, bond and commodity markets have recovered strongly through 2009.  2010 ought not to offer the same upside potential simply because we have already had the sharp recovery but, around the globe, interest rates are relatively low which will encourage investors to keep shifting away from cash.  Companies’ trading fortunes are generally better although UK investors could well look overseas for some equity exposure as poor UK economic numbers could hold back the stock market.

The UK commercial property market has a tougher way ahead as the banks pull back their support for this sector.

After a strong performance in 2009, corporate bonds have enjoyed their recovery phase and whilst there is a sound yield to enjoy risks to capital values will creep in as and when interest rates rise (although that might not be until 2011 in US, EU and UK).

Emerging markets have performed strongly in 2009 leading any contrarian investor to look elsewhere but the growth expectation in those markets is encouraging.

Overall, 2010 should be a quieter year than 2009 and although shocks can appear we are looking forward to steady returns.

Author: Graham Barnes, International Director

December Highlights

• In US another strong month propels US stockmarkets to new highs for the year 
• US Economic news is generally positive, with business activity and retail sales improving 
• Eurozone out of recession in Q3 
• In Europe Bank lending remains weak 
• In UK large cap equities outperform mid – small caps 
• Third quarter GDP growth in India reached 7.9% year on year 
• Latin American region outperforms but gains held back in emerging Asia 
• UK Government bond yields fell marginally 
• UK MPC extend quantitive easing by £25bn

The Chancellor has delivered his latest Pre-Budget Report. For an overview of the detail please visit our  Pre-Budget Report.

Even as the FTSE tested 5,000 (the wrong way) and the DOW retested the 10,000 mark any sane investor would have been happy with progress over October and November.  When you remember that just in March 2009 the FTSE stood at 3,500 and the Dow at 6,500, it is clear that markets have come a long way and that a correction or two is inevitable.  Other markets have also recovered.  Corporate bond markets have had their best period ever and commodities have rebounded strongly. Gold is in the news as fears of Dollar weakness and returning inflation push investors (often central banks) into a physical asset.

So where do we go from here?  First, the economies of the US, Europe and the UK must, sooner or later, be restricted by the burden of quantitative easing.  All of that Government support will have to be paid for – either in extra taxation or inflation.   For now though, equities still look cheap and (as commented last month) the markets are behaving true to form as we pull out of recession – with plenty left to go for.  To me that suggests a higher emphasis on the emerging markets for growth and the shares of Western companies with interests in those markets, and some local companies too, for income.

Corporate bond markets have given most of the capital gain that was there.  Concerns that central banks will eventually raise interest rates will restrict future upward potential although a decent income can still be had.  With deposits yielding such a poor return there is much to be gained by investing for the longer term at favourable levels in both bond and equity markets.

The rise in the price of gold reflects a growing sense of unease amongst the central banks of developing nations that the Dollar will weaken. Many economists argue that the developing nations’ currencies must strengthen (which they surely will as their share of world trade grows further) and in the meantime gold is seen as a modest alternative to holding reserves in the Dollar.

Author: Graham Barnes

Highlights for November 2009

• US emerges from recession with stronger-than-expected annualised third-quarter growth of 3.5%
• Third-quarter US corporate earnings-per-share easily beat consensus estimates
• Economic sentiment across Eurozone rises for seventh consecutive month
• In Europe inflation remains negative, while unemployment edges higher
• Risk aversion in the second half of the month leads UK equities into negative territory in October
• Despite this, the FTSE 100 index manages to end the month above the psychologically-important 5,000 level
• UK GDP declines for sixth consecutive quarter
• Authorities in India, Singapore and Indonesia all increase 2009 GDP forecasts
• Japanese exports and industrial production improve, while unemployment falls for the second consecutive month
• Credit markets see further gains, led by lower quality debt

With the Dow Jones Index breaking back through the 10,000 mark, we have reached a real milestone for equities. At the same time, the FTSE 100 has pushed comfortably through the 5,000 level. Thus the Dow Jones and FTSE 100 have risen by 11% and 15% in local currency terms since the beginning of 2009 and by 46% and 44% since March.

Investors face the prospect of very low returns on cash deposits and have clearly fuelled rises in the price of most risk assets this year. Bonds and commodities have moved up strongly too.

Can equity markets continue at this rate? Certainly there is clear historic proof that the market recovery will continue for some time yet.

The markets have rallied because of the huge support provided by World Governments to the financial system and we have two statements from central bankers demonstrating that commitment will remain in place for some time.

“I believe that policy makers should err on the side of caution as they decide when to exit from their crisis response policies.”
Dominique Strauss-Kahn, Managing Director of the International Monetary Fund speaking in Berlin on 4th September 2009

“It is far too early to talk about an exit strategy. The economy may face a bumpy road ahead”
Liu Mingkang, Chairman of the China Banking Regulatory Commission, speaking in Hong Kong

So, our view on equity markets has shown to be right. It is possible, even now, to buy shares with an income higher than that paid on UK gilts. Surely it is better to invest in strong business with the prospect of growing dividends than with the Government at a fixed (and very low) rate.

The fear remains that the economies of the UK, USA and Europe will struggle to grow under the burden of the support provided by their Governments to financial markets. That burden is much lower in the emerging markets hence our long term view that those are the areas to look for growth.

And the threat of inflation? In our view it is still there but perhaps two or three years away. In the meantime, with interest rates set to remain low the outlook is good for risk assets.

Author: Graham Barnes

Highlights for October 2009

• Evidence that the US is exiting recession boosted by upbeat retail sales and housing data
• US dollar remains under pressure
• In Europe improving economic outlook and better-than-expected earnings results provide support for equities
• Strength of the euro currency remains an area of concern for the region’s exporters
• The FTSE 100 index rallies through the psychologically important 5,000 for the first time since October 2008
• Economic data less buoyant as reflected by a further rise in unemployment levels
• Equity markets in Asia ex-Japan extend their recent rally
• Japanese stocks lag due to political concerns and possible regulatory changes to the banking sector
• Double-digit monthly returns in several countries, including Brazil and Russia
• UK corporate bond market posts sixth consecutive month of positive returns

One Year On
How quickly the year has passed since the collapse of Lehman Brothers. So horrible were the events that I am glad it did go by in something of a blink. The six months to March 2009 saw the capitalist system tested as never before, but the six months since have witnessed the stock market recover in spectacular fashion. The outlook is encouraging – manufacturing output has begun to recover as Governments continue to breathe life into their economies. There are signs of an end to the gloom in the US and UK housing markets but, as yet, no real sign that Western consumers are shopping with their previous gusto. Perhaps that will start to happen eventually but, in the short term, with unemployment still rising that seems unlikely.

After this last twelve months then, I am relieved that markets have recovered some of their poise and, due to the liquidity around, seem to offer more on the upside. That’s simply because so many investors will not want to stay on the sidelines and will therefore join in with those who got in earlier. Concerns are being expressed about a resumption of inflation which explains gold’s renewed assault on the $1,000 level, but whilst that to me is a valid long term worry the more immediate concern is at the retail level. The US and UK economies have been powered by domestic consumption – without that getting back to previous levels it is hard to see where long term growth will come from. Elsewhere, especially in Asia, there are more positive signs.

And yet, with interest rates low (and set to stay there) savers and investors need a clear message. That is, do invest but be careful where. There are ample opportunities for investment away from the US and UK and sensible alternatives for income seekers in the UK for those who want their return in Sterling.

Author: Graham Barnes, Director, The Fry Group

Highlights for September 2009

• US Economic indicators point to the recession coming to an end. However, little encouragement from the consumer sector as retail sales disappoint amid a weak labour market
• White House raises estimate of the 10-year federal budget deficit by US$2 trillion to US$9 trillion
• France and Germany emerge from recession
• Another positive month for UK equities
• UK Quantitative Easing Asset-Purchase programme extended by a further £50bn to £175bn
• Signs of economic recovery in Hong Kong and Taiwan sees official GDP targets for 2009 revised higher
• Global emerging market equities dragged marginally lower by China on worries over policy tightening
• UK corporate bond market posts fifth consecutive month of positive returns
• High-yield defaults increase, although the projected peak default rate falls

After their efforts over the last year, the world’s central bankers are enjoying a rest but rather than languishing on the beach they have congregated in Jackson Hole to discuss global finance.

Two clear messages have emerged. First, there is broad consensus to maintain the monetary stimulus and, second, there is little danger of inflation returning and so interest rates are likely to remain at low levels for the next year or even two.

Maintaining the stimulus which has given heart to developed nations recently is very welcome. In Asia and the developing economies rates of growth are bounding back to normal as finance frees up.

The implication for private investors is this. First, the global economy seems set to pull out of recession. Government spending and the emerging markets’ recovery are pushing this recovery along. There is no doubt that the shell-shocked global consumer will soon need to join in but for now the worst is past. So, we can all take comfort from the assurance on high that the feared meltdown is over.

Second, if interest rates are to stay low then investors and savers need to move to or stay in real assets. But if you are anxious and prefer to stay in cash then do at least look around. It is possible to find over 3% for Sterling deposits – without going near a risky institution or country.

For those who held risk assets and stayed the course then your fortitude has been rewarded. Although the recovery in the world’s stock markets has been short and sweet – so far – history suggests that there is more to come. No doubt there will be a set back or two along the way but after a lengthy summer the water in the pool seems right for a dip.

Highlights for August 2009

• US Stockmarkets forge ahead on good second-quarter corporate results
• Unemployment continues to rise, clouding the outlook for retail sales and other areas of consumer expenditure
• Eurozone CPI falls to -0.6% while unemployment continues to rise
• Weak start to the month more than offset by later stockmarket rally on better-than-expected company earnings, demand for mining stocks and improved economic data
• Inflation falls below the Bank of England’s 2% target for the first time since September 2007
• Housing market shows further signs of stabilising
• Chinese second quarter GDP growth rebounds to 7.9% year-on-year (y-o-y), from 6.1% y-o-y in Q1
• Q2 GDP growth in Korea and Singapore also better than expectations
• Spreads on some sections of the market return to levels last seen before the Lehman Brothers bankruptcy. Across the spectrum credit markets are in positive territory YTD
• Sterling three-month interbank lending rates fall to the narrowest spread over Bank Rate since February

We are delighted to announce that our Select Cautious Return fund will shortly be available in Euros. We have decided to introduce this Euro denominated fund after calls from clients, given that there are very few similar offerings in the market.

Cautious Return has performed well during the last few months, and is currently offering a 4.2% yield. When you compare this to current returns for cash and corporate bonds, it is certainly worth considering what a low risk fund such as Select Cautious Return can provide.

The fund’s performance has been sound, but, as with all assets, the credit crunch, beginning with the collapse of Lehman Brothers, took its toll. Cautious Return has recovered, and performance is improving month on month. The latest fund fact sheet (available in our Library) shows longer term performance information since the fund’s inception.

Essentially, Cautious Return invests in a diversified range of fixed interest securities and currencies. It is designed to be an ‘all weather fund’ providing an attractive total return. The strategy is ideal for those seeking a higher return on cash deposits and as a more modern alternative to bond portfolios which carry the inherent risk of capital loss.

Select Cautious Return is an offshore fund, so does not suffer tax at source for UK non-residents. It is suited to low risk investors who are looking for capital preservation and long term income generation.

The new share class provides access to the underlying fund, but offers a Euro return for those who seek that.

We expect the new share class to launch in September 2009. If you would like more information about this investment opportunity please contact us.

Source: Financial Express Analytics, as at 29th June 2009. Performance quoted on a bid to bid, gross total return basis, in Pound Sterling. Past performance is not a guide to future returns. The price of units and shares and the income from them may go down as well as up and you may get back less than you invested. Exchange rates will also cause the value of underlying investments to fall or rise. The performance graphs show one year performance only. This is to illustrate how the funds have operated during the current difficult markets. Figures are also available on request for 3 years, 5 years and from outset of the funds. One year performance cannot be seen as representing longer term performance trends.

The Fry Group opened a Yorkshire office on 1st May 2009. The Yorkshire office is looked after by our UK Executive Simon Hulme. Simon has been working with our clients in the North of England since 2006. He joined the industry in 1984, and specialises in portfolio management and Inheritance Tax mitigation. Simon is qualified to FPC level with additional qualifications in Law.