In such an environment, fixed interest funds stood out as the top performers, with the largest gains posted by Index Linked Bonds. The year to date has continued the uncertain trend, with the first and second quarters generating contrasting market conditions. Improving consumer and business confidence, in addition to policy stimulus, buoyed investors in the first quarter, with the US particularly favoured due to its perceived superior growth prospects for the remainder of 2012, while emerging markets also benefited from greater risk appetite, posting 11% gains that outstripped almost every other region or asset class. However, progression into the second quarter brought with it the return to prominence of the sovereign debt problems in Europe, with investor focus concentrating on how viable Spanish finances are in their current form, as its borrowing costs surpassed the 7% threshold, a level regarded as unsustainable and which necessitated the bailouts of Greece, Portugal and Ireland previously. In June, markets rallied as Spanish banks received €100bn to prop up their balance sheets, however initial euphoria dissipated as concerns grew the package was not enough. Quarter 3 has been mixed thus far, as although the ECB have announced they will intervene to lower the cost of Spanish borrowing, a statement which spurred risk assets globally, it has emerged that the problems in Spain are becoming more entrenched; several Spanish regions have indicated they will request assistance from central government in the near future. China has suffered a fall back in its economic growth, and has reduced bank reserve requirements and interest rates in response, while weaker data is beginning to come out of the US. In terms of asset performance, equities in general have navigated turbulent markets relatively well, as has Property. Conventional fixed interest funds are continuing to post positive returns on the year, however index linked have dipped into slight negative territory as inflation eases.
In our view the economic backdrop is likely to remain uncertain for the rest of 2012 and as such we maintain our cautious stance. The European sovereign debt problems remain unresolved definitively, despite commitments from the ECB that they would do whatever it takes to support the Eurozone bloc, and the outlook for Germany – the largest European economy – is looking increasingly worrisome as its debt-to-GDP ratio escalates. Upcoming elections in the US are likely to mean no additional stimulus from the Federal Reserve between now and the election for fear of political motivations. The onset of severe austerity measures in late 2012/early 2013, amounting to some 3% of GDP, will undoubtedly have an impact on the world’s largest economy, to the detriment of its trading partners. Although the emerging nations are showing signs of slowdown of late, the lower debt burden they enjoy gives scope to ease both fiscal and monetary policy to try and combat this, not just monetary in the case of their developed world counterparts. While cautious in our view, we still prefer defensive equity funds focused on quality dividend paying companies to bonds, which we believe offer very little value as a consequence of QE and forced purchases by banks. Despite recent struggles, we are still positive on prospects for emerging equity, as they have the ability to offset such struggles with the two-pronged policy approach, as mentioned previously. Given our cautious view, we will look to maintain the cash holdings within the portfolios that have been gradually built up of late. Our stance on Absolute Return funds remains positive albeit with an increasing focus on lower risk strategies that have lower correlations to traditional asset classes, thus providing greater diversification benefits. The asset protection mode of our portfolios which has proved effective throughout a very challenging year is set to continue.