UK: Deloitte Monday Briefing (On Tuesday): The Market View

Last Updated: 28 August 2012
Article by Ian Stewart

Most Read Contributor in UK, August 2017
  • Asset prices are an important indicator of financial market sentiment. Fluctuations in asset prices provide a useful, but ever-changing, perspective on where financial markets think the world economy is going.
  • Given the deterioration in the global economic outlook one might have expected safe, low risk assets to have done well at the expense of riskier ones such as equities and corporate bonds this year. Yet exactly the opposite has occurred.
  • Global equity markets have returned 11% this year compared to a virtually flat return from government bonds. Lower quality debt issued by companies, so-called junk bonds, have also delivered strong returns. UK junk bonds have returned 21% this year, more than twice that on the top rated corporate bonds.
  • So how can we explain the apparent paradox of such strong returns to risk assets in what remains an uncertain world?
  • Low or no returns on low risk assets such as cash, government bonds and gold, have probably pushed some investors into higher yielding, riskier assets. We've often heard the argument that it's better to invest in solid, well capitalised companies than highly indebted governments. And underlying this year's rally in risk assets seems to be a belief that policymakers will, eventually, do whatever it takes to sort out the euro crisis. It is striking that the big bounce in equities kicked off in June after the EU announced its bailout of Spanish banks.
  • But taking as a starting point the beginning of the global financial crisis in 2007, this year's rally in risk assets looks an aberration. Low-risk assets such as bonds have been the big beneficiaries of the uncertainty and economic weakness. Since 2007 US government bonds have given a 40% return against a 15% return on US equities.
  • Other, supposedly safe assets, such as gold and the Japanese yen, have also benefitted from the uncertainty of recent years. A UK investor who bought yen in 2007 would have made a return of 87%. Gold has yielded a return of 158% over the last five years making it the best performing major asset class.
  • Over the last five years, investors have also ploughed money into 'real assets' such as commodities. More recently agricultural commodities have risen in value driven by shortages caused by droughts in the US Midwest and, last year, in Russia. This month the price of corn reached an all-time high, having risen 127% since 2007.
  • Yet what stands out is how quickly market views change. Witness the poor performance of gold this year or the seesaw performance of emerging market equities: down 54% in 2008, up over 100% in 2009-10, down 19% last year. As retail investors are often reminded, past investment performance provides no guide to future performance.

MARKETS & NEWS

UK's FTSE 100 fell 1.3% last week due to a sell-off in mining stocks.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

  • The UK government had to borrow £600m to cover an unexpected budget deficit in July, driven by lower-than-expected corporation tax receipts – slowdown
  • Ratings agency Fitch claimed that any change from the UK government's planned austerity programme "would pose some risk" to the country's 'triple-A' credit rating – debt crisis response
  • The European Central Bank (ECB) is considering buying the bonds of struggling eurozone countries in order to keep interest rates below set thresholds, according to German newspaper Spiegel – debt crisis response
  • The German banking association called on the ECB to adopt supervisory powers over the eurozone financial sector in order to free it from "the influence of national politics" – euro crisis response
  • Spain's economy minister Luis de Guindos said that the ECB should set "no limit" on buying sovereign bonds on the secondary market – debt crisis response
  • The ECB announced that it will be recruiting for 40 new positions to help ease the pressures on "overworked" staff – debt crisis response
  • Greece's Prime Minister Antonis Samaras called for eurozone creditors to give Greece "a little room to breathe" in enacting agreed austerity measures – Greece
  • UK's second quarter GDP growth estimate was revised upwards to -0.5% year-on-year due to stronger-than-expected performances of the construction and production sectors – UK growth
  • US luxury homebuilder Toll Brothers reported a 41% rise in revenue in the three months to July as they experience the "most sustained demand" in over five years – US housing rebound
  • Japan's trade deficit of £4.14bn in July, the largest ever recorded for the month, with exports to the European Union falling 25.1% year-on-year – Japan
  • Russia was admitted to the World Trade Organisation (WTO), the global body in charge of setting international trade rules and mediating disputes – emerging markets
  • American investor George Soros acquired a 7.85% stake in Manchester United Football Club – Manchester United
  • Apple Inc. became the most valuable company ever, with a market value of approximately $623bn, surpassing the $620.6bn Microsoft reached in 1999 – Apple
  • Peter Thiel, one of the first entrepreneurs to invest in Facebook has sold around 36m of his shares in the company since it went public in May – Facebook
  • The UK's telecoms regulator Ofcom allowed mobile providers Orange and T-Mobile to use existing bandwidth to provide "4G" mobile services, which provide much faster download speeds – digital revolution
  • Sales of bicycles in Greece increased by approximately 25% in 2011 according to government statistics, as the high cost of road tax and fuel resulted in a 40% decline in car journeys – business cycle
  • The number of second-hand Ferraris and Maseratis exported from Italy rose almost 200% in the first five months of 2012 compared to a year earlier, according to auto industry group Unrae – fast exit

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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