Markets had a volatile half year with steep declines in most asset classes in January and February being reversed by strong rallies from March through May. June saw some consolidation as doubts about the sustainability of economic recovery returned.
Within our range of portfolios all bar the Adventurous portfolio are in positive territory over the first six months of the year.
Our overweight position in UK Index Linked bonds has justified itself, it is now up 2.8% year to date having been down 2.0% when we last wrote. In addition, our decision to remain underweight Global Bonds – the best performing asset class of 2008 – has also helped our portfolios. Year-to-date Global Bonds are down 12.6%. However our call to go underweight in UK Corporate Bonds did mean that we missed out on the recent rally in the sector.
Equities enjoyed a very good six months, notably Emerging Markets which were up 34.4%. Here our overweight position has proved to be correct. However our decision to be underweight the UK and overweight Global markets has so far been the wrong call. Over the period the UK outperformed Global markets by 13.6%. A large proportion of this was due to the appreciation of Sterling and going forward we see this reversing as the UK sees a continuation of weak corporate earnings and further dividend cuts and equity issuance to repair balance sheets. Therefore we believe that out position will be justified over the next 6-12 months.
Looking Ahead: Although markets are now heading up again we believe that the global economic picture remains far from certain. Even if there is further evidence of recovery in the coming months we would continue to caution against taking big bets. While lower interest rates and improved commodity prices and risk appetite have helped some of the Emerging Markets and Chinese growth appears to remain robust, Western economies continue to struggle under massive debt burdens and pressures on the consumer. In the UK, for example, although interest rates remain low, new mortgage deals are being set at higher rates, cutting disposable income. In addition, higher oil prices (more than double their lows) and concerns about unemployment are putting further pressure on consumer spending. With the Bank of England refusing to extend their Quantitative Easing programme, the focus is now on spending cuts at the national, corporate and personal levels, in order to restore balance sheets and pay for past excesses. Also, we can not rule out further bad news from the banks – albeit more traditional bad news this time with rising corporate and personal defaults. On the positive side, corporates are further down the cost-cutting path than in previous cycles which gives us optimism that earnings will at least not worsen and that a FTSE-100 Index fair value of 5,000 is still appropriate. However, we see Sterling weakening given the massive budget deficit and continuing political paralysis.