Market Update: 04 January 2012
UK
It was very thin in terms of economic data and releases out of the UK over the last week due to markets being closed for Christmas and New Year, but the Chartered Institute of Personnel and Development issued a report highlighting their forecasts of unemployment which peak in the first half of 2013 at 2.9 million people.
Europe
The main event in Europe last week was the successful €9 billion Italian bond auction in which the average yield on the 179 day bills was 3.251% versus the 6.504% that the country was paying on the same bills just over one month earlier. Over the week we also observed that the European Central Bank’s deposit facility has grown to an all time record high of €412 billion, suggesting that European Banks are currently favouring the safe but low returns offered by the European Central Bank as opposed to the potentially higher returns available through lending.
US
Mainly positive data out of the US helped prompt a rise in the Standard and Poors 500 index in the run up to year end 2011. Durable goods orders were up 3.8% over the month of November versus expectations of 2.2%. Consumer confidence figures saw a large increase over the month of December to 64.5 up from 55.2 the previous month and beating expectations of 58.9. Personal Income was up 0.1% over November versus expectations of 0.2%, while Personal Consumption Expenditure increased a similar amount over the same period.
Global
The managing director of the International Monetary Fund echoed the pessimistic view of Angela Merkel warning that growth forecasts of 4% for the world economy in 2012 could be revised downward. Gold plunged last week to new recent lows of $1545 dollars per ounce before rebounding in recent days to levels closer to $1600. The Japanese government confirmed that new bond sales will exceed tax revenues for a fourth consecutive year, highlighting the dependence on sovereign debt issuance in the country.
Macro comment
In his inaugural presidential address in early 1933 Franklin Roosevelt uttered the phrase that, ‘The only thing to fear is fear itself’. Overall 2011 has been an uncertain year for the financial markets but there have been opportunities to make returns and/or protect portfolio values through the careful selection of equity and bond positions plus the retention of a good gold holding. Turning to 2012, at first glance little appears to have changed. The issues in the Eurozone remain unresolved, high debt levels are still apparent in the Western world and fears of a slowdown in economic growth levels in the emerging markets.
However we believe that changes are afoot. Most Continental European governments are very committed, politically, to the maintenance of the European single currency zone. We believe that this commitment will lead them further down the road of embracing quantitative easing. The US, as well as our own country, has shown that such a policy action is no panacea but it is likely to be the next to be tried. Similarly we anticipate that the Federal Reserve in the United States will sanction greater use of quantitative easing in the first quarter of 2012. The action of printing more money in key developed market geographies around the world combined with a likely fall in Chinese interest rates provides an opportunistic backdrop for global equity selections. We believe 2012 will suit our more stock specific investment style. We will endeavour to meet even more companies directly and hence gain more specific insights to the benefit of the investment portfolios that we run. We still believe that gold, and gold related investments, are significant. More money printing around the world accentuates the commodity’s role as a store of longer-term purchasing power. Gold, via both holdings in gold mining equities as well as products linked to the gold price, will remain an important part of our portfolios in 2012. Sovereign bonds still look mixed value to us versus corporate bonds where we can not only find yield pick-ups versus gilts but also a shorter maturity portfolio which can lessen volatility. Corporate bonds also have the benefit of linking with our direct meetings with companies where we often get insights on both the equity and corporate bond investment opportunities for a specific company. So we enter 2012 with the perception that, whilst there are some clear macroeconomic issues to be concerned about, there is a good range of investment opportunities for us to access, particularly via the flexible Close Portfolio Funds.