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Since my last bulletin the global equity markets have proved to be very volatile. The FTSE 100 has attempted to rally through the banking problems with help from sectors such as mining and healthcare. Whilst this has helped to underpin a positive month in the portfolios, I am sceptical that the returns can be sustained. 

From a macroeconomic perspective I feel that the US recession has not been completely discounted in the market place. The US earnings season that just past has seen large bell weather companies such as GE and Microsoft disappoint. However, following a dismal quarter from a news perspective, any good news was treated with large rallies (Multiple US interest rate cuts) in the US market and subsequently in Europe.

Over the month of April the portfolios have recorded a positive performance as outlined in the table below. 
 
Net return for April
Portfolio Active Balanced Cautious
% Return 2.49% 2.25% 1.23%

With the semi-annual rebalancing date coming up in two weeks time there are a variety of issues that I am concerned with that could further destabilise the markets going through the summer. As such I am looking to further place a defensive slant on the portfolios going into the summer. 

The principle fears are the effects of inflation and the potential need for interest rate RISES in an environment that requires cuts to stimulate growth. Both the Bank of England and the European Central Bank are very focused on controlling inflation through the use of monetary policy – interest rates. As such, should we see the recession that is prevalent in the US translate to the UK and Europe then the capacity for our Central Banks to cut rates could be limited. Such pressure could lead to sizeable downside shifts in growth projections and thus profits which will undermine stock prices and lead to a downward trend in the equity markets.

The next factor that could instigate falls, particularly in the UK stock markets is a fall back in the Oil/commodity prices. Over the last 9 months the Oil price has rallied as a result of inventory figures, refinery pipeline disruptions, a weak dollar and increased demand from Asia. As such the stock prices of associated mining and resource stocks have catapulted the index benchmarks forward. The question is what next. To an extent I believe that a lot of the bad news is already priced into the figures and as such the potential for Oil to slide back sub $100 dollars and ultimately back to $80 by the end of the year is real.

The reasons for this belief is the fact that the summer months will see the inventory levels recover as demand slows, the dollar strengthening against sterling and the euro, disruptions in Nigeria subsiding. Unfortunately demand from ASIA will still put the brakes on a rapid tail back in the price. Should this materialise and if the commodity “Bubble” evenly slightly deflates, the share prices of the aforementioned sectors will come under pressure.

Bearing in mind the inflation problems and the “Commodity Bubble” (memories of the technology bubble and the Commercial property bubble) I would like to not only rebalance the portfolios but also reduce the risk levels of the portfolios until visibility in earnings, the credit markets and the commodity cycle become clearer.

An old saying in the market place that plays true more times than not and one that I like to adhere to is 


“SELL IN MAY AND GO AWAY- DON’T COME BACK UNTIL LABOR DAY”

This saying relates to the fact that during the summer months traders go off on holiday and trading becomes very light. As such any bad news is normally magnified as no one wants to take on risk.


Following theses switches the Portfolios will hold 30% in cash. The cash fund that we use currently offers 4.9% net therefore competitive in this environment. As usual we will be looking actively for opportunities for reinvestment.


Gavin Curran ASI

Investment Manager





   




  






 

 

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