Monthly market update
January 2009 - Markets overview
Cash
Sterling: The Monetary Policy Committee (MPC)
cut rates by 0.5% in January and has just cut them by a further
0.5% in February - this leaves policy base rate at 1%.The UK
economy officially tumbled into recession following the
announcement that GDP fell by 1.5% in the fourth quarter of 2008,
being the second successive quarterly fall. The economy is
contracting at its fastest pace for nearly 30 years as the crisis
in the financial sector has migrated to the real economy.
Collapsing corporate profitability and rising unemployment,
together with a severely weakened banking sector restricting access
to credit, are strong headwinds facing the UK economy. Policymakers
remain committed in their undertaking to do whatever it takes to
arrest economic decline and we should expect further coordinated
action in the months ahead.
US dollar: The Federal Open Market Committee
(FOMC) met at the end of January and decided to keep its target
range for the federal funds rate at 0% to 0.25%. In its statement,
the committee noted that it anticipates economic conditions are
likely to warrant exceptionally low levels of the federal funds
rate for some time. It added that information received since the
committee met in December suggests that the economy has weakened
further. Industrial production, housing starts, and employment have
continued to decline steeply, as consumers and businesses have cut
back spending. Furthermore, global demand appears to be slowing
significantly. Conditions in some financial markets have improved,
in part reflecting government efforts to provide liquidity and
strengthen financial institutions; nevertheless, credit conditions
for households and firms remain extremely tight. The committee
added that it anticipates a gradual recovery in economic activity
will begin later this year.
Bonds
Sterling: The combination of interest rates at
all-time lows and inflationary pressures all but dissipated, at
least temporarily, creates an ideal environment for bond investors.
The key question faced is whether to remain conservative and commit
exclusively to government issued debt or increase risk by investing
in corporate issues. Evidence suggests investor risk appetite is
returning, with fund managers reporting increasing capital flows
into corporate bond funds. One of the potential downsides for
corporates seeking to raise cash via the bond markets is the
possibility they will be crowded out by the wave of debt to be
issued by the UK government, which has to finance its fiscal
stimulus and bank bailout strategy.
US dollar: Interbank rates have narrowed and
the issuance of corporate debt has increased, with USD170billion
raised by non-financial corporates in January. Whilst a degree of
normalcy has returned to the credit markets, liquidity issues
remain and spreads continue to be elevated. Implied default rates
suggest that corporate finances are in a worse state than those
seen in the1930s and this perceived dislocation has attracted
investors to the investment grade corporate bond sector. Brave
investors can seek the potential for elevated returns from the high
yield sector, however, rating agencies are warning of 'significant'
default rates.
Equities
(Sterling and US dollar): Global equity markets
started 2009 strongly following a positive return in December,
however, concerns over the stability of the global banking sector
resurfaced. During January, Citibank reported heavy fourth quarter
losses, Bank of America requested government support following
losses accumulating in newly acquired Merrill Lynch, and, in the
UK, Gordon Brown and Alistair Darling were forced to announce a
'second' bank rescue plan. By month-end, global equity markets
posted the worst January performance on record with the MSCI World
Index down 8.74%. The continued destruction in value suffered by US
banks is illustrated by the combined weighting of regional banks,
plus diversified banks, plus brokers, plus investment banks now
making up just 2.6% of the S&P 500Index -this is less than the
weighting of the soft drink industry in the same index. An
increasing number of commentators have started to argue valuations
are beginning to look compelling, however, many wealth managers
remain significantly underweight equities given the ever-worsening
corporate and economic newsflow.
Property
(Sterling and US dollar): The asset class
continues to suffer deteriorating metrics. Capital Economics has
recently reported that rental values across all property in the UK
were expected to decline by at least a fifth in total over the next
two years. They advise the London West End office market will be
one of the biggest casualties 'as more hedge funds go to the wall
and job losses mount'. According to Jones Lang LaSalle, the
property consultancy, the value of property fell 14.3% in the
fourth quarter of 2008 across all classes, with a fall of more than
25%in total on an annual basis. Offices and retail were the worst
performing sectors and a real barometer for the current state of
the global economy.
Alternative investments (Sterling and US dollar)
Hedge funds: Despite falling equity markets and
grave economic data, the fund of hedge funds sector managed to
deliver positive returns during January with the HFRX Global Hedge
Fund Index rising around 1%. Many are taking this as a sign markets
are returning to more 'normal' conditions and rationality is making
a comeback. Given the sharp reduction in the number of hedge fund
managers following the brutal deleveraging through the second half
of 2008, the 'opportunity set' available to surviving managers is
looking more attractive and they are trading in a far less crowded
space.
Commodities: Demand for oil remains weak given
the acute slowdown in global economic activity. In the space of a
year, investor debate has moved from the concept of 'peak oil' to
how can the world store all the excess oil drilled, but not yet
used. The demand for base metals is equally weak, evidenced by
inventories at London Metals Exchange warehouses having soared over
the last three months. Aluminium stocks are at record highs, copper
stocks are at their highest levels since 2003 and nickel stocks are
at their highest level since 1998. It is clear demand is waning
faster than producers can cut supply.
World markets
|
Index |
Price |
Up / down on month |
| FTSE 100 |
4,149.64 |
Down |
| DJ Ind. Average |
8,000.86 |
Down
|
| S&P Comp |
825.88 |
Down |
| NASDAQ |
1,180.25 |
Down |
| Nikkei |
7,994.05 |
Down |
| £ / $ |
1.4418 |
Down |
| € / £ |
0.8880 |
Down |
| € / $ |
1.2803 |
Down |
| £ base rate |
1.50% |
Down |
| Brent Crude |
44.22 |
Up |
| Gold |
921.71 |
Up |
Prices quoted as at 30/01/09. Source: Lipper
Hindsight.
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