Fiducia Market Commentary
Despite events in 2011 stock markets ended the year with very different performance. In the US the S&P 500 was up 0.74%, in the UK the FTSE 100 was down 5.55% and unsurprisingly the DJ Euro Stoxx Index was the worst, down just over 18%. Investor confidence was high in the first half of 2011 as markets shrugged off several significant events, from the nuclear crisis in Japan to unrest in North Africa. Initially bailout packages provided enough liquidity to divert attention from the more challenging questions of the solvency of several EU members. Investor sentiment took a turn as growth and earnings downgrades and reductions in sovereign credit ratings across developed nations, even the US, pressured markets lower. In the ‘risk off’ environment over the past twelve months fixed interest funds have performed strongly, with the largest gains from Index Linked Bonds. Persistently elevated levels of inflation and expectations of future inflation have helped Index Linked returns reach over 20% in the past year. Conventional Bonds have also performed well in this environment despite the historically low yields offered. This trend however, could easily reverse in the absence of a more robust solution to the EU crisis. Other assets considered ‘high risk’, such as Private Equity and Emerging Markets, have performed poorly over the year with both sectors losing near to 10 percent. Absolute Return funds have struggled to keep pace with Bond funds but on the whole have delivered returns in excess of cash, thus preserving capital values in what has been a challenging year. More positive developments include the ECB’s recent agreement to lend to troubled banks over a three year term which has managed to lift bond and equity markets by creating the much needed liquidity in the financial system. As expected inflation has started to fall, hopefully reducing some pressure on the consumer.
The FTSE and other leading stock markets recovered ground in the first few weeks of 2012, but we maintain our cautious stance which we have held for some time. The fundamental differences in policy between Germany and France have to date prevented agreement and a solution to the Euro crisis. As a result, Bond markets have priced in a 30% chance of a break-up of the Euro with spreads between German Bonds and those of peripheral nations now at their highest since the ERM debacle in 1992. Greece, Italy and Spain all now have new governments which are attempting to reduce their respective national debt by even greater austerity measures. We continue to expect a Euroland solution to be agreed which is likely to involve further quantitative easing and encompassing a restructuring of existing debt. The recent intervention of leading Central Banks to make it easier for commercial banks to borrow will go some way to ease the liquidity issues that have been arising in the banking system. We also view the moves by France and Germany to create a fiscal union as very significant and, as a consequence, should pave the way for the ECB to assist Italy and Spain in particular. More positive signs, supportive for equities, are appearing globally with stronger corporate earnings and attractive valuations presented in emerging regions such as India, China and Brazil. While growth has been slowing in these regions, the GDP figures are relatively strong and signs that inflation has peaked have allowed for the beginning of monetary easing. The latest data also suggests that monetary stimulus appears to be working in the US, with noticeable improvements in the money supply. Our emphasis to global equity funds should provide good exposure to the US. We still feel Bond values are in “bubble territory”, largely as a consequence of QE and forced purchases by banks, which at some point will have to be unwound, thus we continue to reduce our Bond exposure. In addition, our equity holdings remain focused on defensive, dividend-paying global companies. The asset protection mode of our portfolios which has proved effective throughout a very challenging year will, therefore, continue.