Form Is Temporary, Class Is Permanent
Markets continue to rally as the possibility of economic meltdown has reduced. However, massive spending is not sustainable and the legacy will be higher taxes with lower growth. Unemployment will rise further and stay high and consumption will remain weak as savings rise. But what does this all mean for the current market? Below we give you our summary of the recent market conditions and our thoughts on future growth areas:
BONDS
Treasury yields have remained low and improving prices have vindicated our view on corporate bonds. Both high yield and investment grade bonds have performed strongly. We are more wary of the former as defaults are likely to rise to record levels. Despite massive quantitative easing we remain optimistic on the inflation outlook. Consequently, we remain positive about corporate bonds. However much of the capital appreciation is now in the price. Although yields remain attractive we are trimming our overweight positions in favour of other asset classes.
EQUITIES
Equity markets have rerated and are no longer cheap, unless one believes in a large profit rebound and on this we remain sceptical. Inventory rebuilding and fiscal spending will continue for a while, but companies have already cut costs to the bone and need higher sales or cheaper capital for profit growth. Neither is likely. We believe, in the long term, Asian and Emerging Markets will be the main source of global growth. However, valuations look rich after a strong run so we will not be raising their allocation yet. True growth companies will command a premium so we are increasing their bias in our portfolios. Smaller stocks have bounced back the most but remain relatively inexpensive.
PROPERTY
The Investment Property Databank UK property index produced a positive total return in July – the first month in two years - and has continued to do so since then. Capital values falling modestly were more than offset by rental income. The outlook for rents is not good, but we believe that capital values will stabilise close to current levels, making current yields attractive. We are beginning to rebuild exposure.
HEDGE FUNDS
The sector has recovered from massive outflows and performance is improving.
COMMODITIES
Commodities have bounced strongly, supported by infrastructure spending led by China. We are adding to our exposure, primarily through trading funds and structured products.
IN A NUTSHELL
ASSET CLASS - VIEW
Bond - Trimming positions
Equities Favour - small caps
Property Rebuilding - exposure
Hedge - Diversifying
Commodities Selectively - adding exposure
HW Financial Services Ltd is authorised and regulated by the Financial Services Authority. The contents of this magazine are intended as a general economic and market commentary and should not be read as specific investment advice. Whilst every effort has been made to ensure accuracy, the information contained in this document may not be comprehensive. Recipients should not act upon this without seeking advice from their usual adviser, noting that past performance is not a guide to the future, that the value of investments may go down as well as up and are not guaranteed.
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Date: 21-01-2010