2009 review
At the start of every new year it is commonplace to reflect on
the year that was and then refocus thoughts on the year to come.
For investors, in many ways, this last year has been as demanding
as its predecessor which, we recall only too well, saw the global
financial system taken to the brink of collapse. Based on the
performance of markets during the second half of 2009, it is very
easy to forget just how grave the outlook was at the turn of the
year and, by March, how markets had discounted another Great
Depression. Bonds were priced for ten years or more of deflation
and the long run implied rate of dividend growth in equity markets
was approaching zero. Investor sentiment was extremely pessimistic
and economic prosperity, particularly in the West, appeared to be
at risk. The adage ‘it is always darkest before the dawn’
could not have applied more, as a trickle of ‘less bad’ economic
data proved a catalyst for a very sharp recovery in confidence and
risk appetite. Greater visibility over corporate earnings prompted
investors to take advantage of extreme valuations and drive markets
up. Although equity markets have recovered strongly, it is
important to note they are still trading at levels below where they
were before the financial crisis began. If it were needed, this is
a telling reminder of what an extraordinary period investors have
endured.
Despite investor confidence (or relief) markets have faced some
tests during the final quarter of the year. Revised releases of
third quarter GDP numbers in both the UK and US fell short of
consensus expectations and industrial production in Western
economies was generally weaker than forecast. Debt servicing
problems emerged in Dubai and the credit rating agencies downgraded
Greek sovereign debt and placed Spanish debt on negative watch. The
fragility of the economic landscape was further evidenced by the
Bank of England’s decision to increase its quantitative easing
programme and Ben Bernanke, the Chairman of the Federal Reserve,
has considered it necessary to repeat his message that interest
rates will continue to remain very accommodative until a
sustainable economic recovery is underway in the US.
Notwithstanding these headwinds, the combination of better than
expected corporate earnings, improving profitability and supportive
monetary policy has convinced many investors and commentators
alike, this ‘sweet spot’ for risk assets is set to persist. You
will not be surprised to read our view is not quite so optimistic,
albeit we do acknowledge booming new orders, very positive leading
indicators and the vast pool of liquidity should prove supportive
in the near term. More on this to follow soon.