Monthly market update
October 2008 - Markets overview
Cash
Sterling: The Bank of England
was one of a number of central banks which cut rates in early
October as the authorities fought to stabilise capital markets
which had spiraled into chaos following the bankruptcy of Lehman
Brothers. This interest rate cut in tandem with the capital
injections into a number of high street banks and additional
liquidity provisions enabled the Bank to restore some order in what
had become a very grave situation for the UK banking sector. The
bank rescue plan instigated by the UK received global acclaim and
the model has been copied by a number of governments around the
world. The underpinning of the banking sector has allowed investors
to concentrate on economic fundamentals which have deteriorated
sharply in recent weeks. The Office of National Statistics has
confirmed the UK economy contracted during the third quarter and
the Monetary Policy Committee has acted decisively by cutting
interest rates by a further 150 basis points following its November
meeting. UK base rate is now 3% - the lowest official rate since
the 1950s.
US dollar: The US Federal
Reserve and US Treasury endured a torrid October following the
delays to gaining legislative confirmation to implement the
Troubled Asset Relief Programme (TARP). Market participants remain
nonplussed as to the architecture of the programme although it too
has confirmed the interventionist stance being adopted by the
authorities and their determination to protect the infrastructure
of the US banking system. The Federal Open Market Committee met in
October and announced a further cut in interest rates by 0.50% to
1.00% - at the same time it announced a number of additional
measures to support capital markets, including opening swap lines
with a number of emerging nation governments. In doing so, the US
central bank has confirmed its status as lender of last resort to
the world.
Equities (Sterling and US dollar)
Due to the wild gyrations across geographic
equity market indices, it is easy to underestimate the magnitude of
the falls in equity market values during the month of October. In
US dollar terms, the MSCI World Index fell just under 19% over the
31 days of the month. To calibrate this, the same index fell 19.54%
in the whole of 2002, the worst year of the 2000 to 2002 bear
market for equities. The year to date performance of the index was
-38.26% to the end of October and investors are clearly nursing
substantial paper losses. Economic data is creating a realisation
the US and Europe are in recession and Asia is facing a marked
slowdown, if not a recession too. A wave of selling as hedge funds
were forced to reduce their borrowing created further downward
pressure on equities and this is expected to continue in the near
term. The effects of the financial crisis are now being felt in the
real economies of the world and corporate profits are likely to
undershoot analysts expectations which will result in future
downgrades.
Property (Sterling and US dollar)
The asset class continues to face significant
headwinds as the credit crunch restricts activity and demand wanes
with falling economic output. A number of specialist funds are
receiving cash earmarked for building portfolios of distressed
property assets and investors prepared to commit for the long term
will no doubt be rewarded for their patience. Near term risks,
however, remain high.
Bonds
Sterling: As the financial
crisis peaked during October, capital continued to flood into short
dated gilts as investors sought the safe haven of triple A rated
debt. Yields became an irrelevance as capital preservation became
the overriding objective for most. Fixed interest markets remain
dislocated as deleveraging and deteriorating economic data continue
to push spreads wider and markets have priced in extraordinarily
elevated default rates across the corporate bond sector. Against a
backdrop of sharply falling interest rates and a dissipation of the
panic circulating traders, investors are increasingly looking at
corporate bonds as an asset class offering the most attractive
opportunities in the months ahead.
US dollar: The US is home to
the largest corporate bond market in the world and the
opportunities presented in the UK, equally apply in the US market.
The challenge facing investors is the evaluation of corporate
credit quality as many fear default rates will rise sharply - a
number of commentators fear it is only a matter of time before one
of the large US car manufacturers fail and their lobbying of the
Federal Government for financial support illustrates the
difficulties they are facing. Offers of 'buy one car and get one
free' are also clear indications of the current plight of the
industry. Corporate defaults will bring the Credit Default Swap
(CDS) market under the microscope as purchasers of bond default
insurance seek to make claims. Many are wary the lack of regulation
of this market could create further systemic pressures as its
functioning comes under pressure.
Alternative investments (Sterling and US
dollar)
Hedge funds: The HFRX Global
Hedge Fund GBP Index fell 10.22% in October and is down 19.43% on a
year to date basis. These are extremely disappointing numbers for
those investors who have used the asset class to manage the
downside risk in their portfolios during 2008. This disappointment
is reflected in the number of redemption requests received by the
hedge fund industry as investors seek to withdraw cash by the end
of the year. Many would argue the reputation of the hedge fund
industry has been damaged beyond repair and it is clear there will
be a sizeable contraction in the number of hedge funds open to
investors. To be fair to many hedge fund managers the conditions
faced have been unprecedented and many highly skilled practitioners
have been unable to escape the destruction in values across all
asset classes. This said, investors are unlikely to sympathise with
an industry which has been unable to deliver on the promises
made.
Commodities: The DJAIG
Commodity Index has fallen by 12.10% to the end of October, having
fallen 13.22% during the month. The global economic slowdown has
weighed heavily on commodity prices and evidence of weak demand
from China has further accelerated declines. The IMF has forecast
the economies of the developed world will contract in 2009 and
whilst infrastructure spending in the emerging nations will
underpin demand for commodities, prices are likely to remain under
pressure. If, as expected, increased infrastructure spending is
targeted by western governments as a strategy to boost economic
activity then any such demand pulse will benefit the sector.
World markets
|
Index |
Price |
Up / down on month |
| FTSE 100 |
4,377.34 |
Down |
| Dow Jones |
9,325.01 |
Down
|
| S&P Comp |
968.75 |
Down |
| NASDAQ |
1,334.78 |
Down |
| Nikkei |
8,576.98 |
Down |
| £ / $ |
1.6115 |
Down |
| € / £ |
0.7920 |
Down |
| € / $ |
1.2760 |
Down |
| £ base rate |
4.50% |
Down |
| Brent Crude |
60.40 |
Down |
| Gold |
732.64 |
Down |
Prices quoted as at 31/10/08. Source: Lipper
Hindsight.
Notice to readers: This document is not
intended as an offer to buy or sell securities. The facts stated
and estimates and opinions given have been obtained from or based
upon sources believed to be reliable; however no representation or
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kind accepted either as to the accuracy, completeness or
correctness of the information stated herein, or that material
facts have been omitted. Any opinion expressed in this document is
a matter of judgement at the time of writing and is subject to
change without notice. Any price shown is only an indication of the
middle market price at the time of publication. Prices may fall as
well as rise and the income derived from them may fluctuate.
Changes in rates of exchange or taxation may have an effect on the
value of investments. Past performance is not necessarily a guide
to future returns and you may not get back the original amount
invested.
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