6 Month Commentary & Market Review
| 31/07/2008 | Local Currency | Sterling | ||
|---|---|---|---|---|
| Capital returns (equities) | 3m | 6m | 3m | 6m |
| UK Market | -11.3 | -8.4 | -11.3 | -8.4 |
| UK Mid Cap | -12.5 | -10.4 | -12.5 | -10.4 |
| UK Small Cap | -14.7 | -15.1 | -14.7 | -15.1 |
| US | -8.2 | -7.8 | -8.2 | -7.4 |
| Europe ex-UK | -12.3 | -11.0 | -12.3 | -6.0 |
| Japan | -4.7 | -3.6 | -7.9 | -4.9 |
| Pacific Basin | -13.7 | -8.8 | -14.1 | -7.2 |
| IFC Emrg Mkts | -13.4 | -7.8 | -13.5 | -7.4 |
| World | -9.6 | -7.7 | -9.7 | -6.2 |
| 10 year bond yields | Yield % | 3m ch. | 6m ch. | |
|---|---|---|---|---|
| US | 4.0 | +22 | +34 | |
| UK | 4.8 | +14 | +34 | |
| Germany | 4.4 | +27 | +47 | |
| Currency | 3m | 6m | Current level | |
|---|---|---|---|---|
| $ vs. £ | -0.0 | +0.4 | 1.981 | |
| $ vs. € | +0.1 | -4.8 | 1.560 | |
| € vs. £ (p/€) | -0.2 | +5.4 | 0.787 | |
| Yen vs. $ | -3.3 | -1.6 | 108.085 | |
| Brent oil in US $ | +10.9 | +35.7 | 123.6 | |
Source: Datastream
Equities have fallen sharply, particularly in the past three months, as coinciding fears of higher inflation and slowing economic growth sapped the confidence of equity investors, unwinding an earlier rally. Central banks signalled greater concern about inflation, faced with soaring oil prices, while the twin pressures of higher raw material costs and reduced credit availability undermined corporate profits. Global equity markets collectively fell 7.7% in local currencies and 6.2% in sterling terms in the six months to the end of July.
The UK market fell 8.4%, with mid-cap stocks and smaller companies lagging, down 10.4% and 15.1% respectively. The US market fell 7.8% in dollar terms and 7.4% in sterling terms. European markets fell 11% in local terms, with the loss almost halved by Euro strength to 6% in sterling terms. In the Far East, markets fell 8.8% in local currencies and 7.2% in sterling terms. Emerging markets more generally also fell, by 7.8% in local currencies and 7.4% in sterling terms. Japan held up somewhat better, falling 3.6% in yen and 4.9% in sterling terms.
Government bond markets have been under pressure, as low yields were seen as offering little protection against rising forecasts for inflation, although a rally towards the end of the period reduced losses. Yields rose by 0.3% over the period in the USA and the UK and 0.5% in Europe. Credit markets remained cautious, with corporate risk premia rising once more, although not as far as in the aftermath of the Bear Stearns crisis.
The US Federal Reserve [the Fed] ended its earlier series of rate cuts in April, since when it has held rates steady, with its Governors having voiced their caution regarding increased inflation risks. The Bank of England has also switched from rate cutting mode and has kept rates at their April level of 5%, having debated the possibility of a rise at its July meeting. An increasingly weak economy and tight credit conditions are contending with rising inflation in the Bank's deliberations, with a further period of unchanged rates most likely, despite a deteriorating domestic economy. The European Central Bank tangibly expressed its concern about inflation by raising rates at its July meeting. Money market interest rates remain abnormally high, indicating that the central bank measures to restore confidence have not yet succeeded in significantly easing credit conditions.
The oil price is up 36% from the end of January, having surged to a record level over $140 per barrel before falling back. This is creating inflationary headaches for the world's central banks, with concerns being exacerbated by price rises in food commodities such as wheat. The resilience of growth in emerging economies has put pressure on raw material prices, reflecting both immediate demand growth and, in the case of oil, fears that present consumption trends will use up current spare capacity within a few years.
On the currency front, the dollar fell 5% against the Euro, rose 2% against the yen and was little changed against sterling (which was also weak against the Euro). Although sentiment towards the US economy remains negative, earlier complacency that other developed economies would be able to avoid the global slowdown has evaporated, creating a two way pull on the greenback more recently. Sterling has been steady after its weakness during the winter months, as rate cut expectations retreated.
Equity markets have been hit by a toxic interaction between the credit crunch and the oil shock. The first has reduced the amount of monetary fuel for economic growth, while the second has squeezed consumer and corporate incomes at the same time as creating inflationary pressures that have prevented interest rates from falling to mitigate the credit squeeze. There is a ray of hope in that the oil price appears to have hit a ceiling, as high prices are reducing demand for oil products. However, investors are likely to be cautious until it is clear whether the recent price fall will be sustained. The credit crunch is being addressed by banks raising new capital but this is putting pressure on equity markets, owing to the amounts involved, while earlier bank worries about write downs have been supplanted by worries about the slowdown. The pendulum of sentiment has swung from complacency a year ago to acute pessimism. Whilst there are reasons to be cautious, nothing is for ever. If oil and commodity prices stabilise or fall, inflation is likely to decline next year, allowing central banks to cut rates at a time when banks may have put themselves in a position to resume lending more actively. Although this may feel a distant or unlikely prospect at present, no-one sounds a gong at the top or at the bottom of market moves.
The FTSE 100 fell 468 points in the six months to the end of July, excluding the benefit of dividends, which particularly affect performance figures during seasonal dividend-paying periods. The 5 main contributors to/detractors from this performance were (in points):
| HSBC | +43.4 | Vodafone | -87.0 | |
| Astra Zeneca | +23.0 | RBS | -69.5 | |
| BHP Billiton | +20.3 | HBOS | -63.0 | |
| Rio Tinto | +16.5 | Barclays | -35.6 | |
| Anglo American | +9.6 | Lloyds | -33.8 | |
| Total | +112.8 | Total | -288.9 |
|---|
Source: Bloomberg
