Market Updates

Update for 2008 | Outlook for 2008

Market Review – First Half 2008

The UK equity market has experienced a roller coaster ride in the first half of 2008. It began the year continuing the downward trend seen in the last quarter of 2007, falling, after a brief rally in February, to a new low in mid-March (when US investment bank, Bear Sterns, was rescued from going bankrupt), staged a stronger but ultimately unsustainable, two-month rally through April and early May, before falling again to new lows in June. By the end of the six-month period the FT All Share index had fallen 13.1% to 2,855.69, at which point it was down 17.9% from its high reached on 15 June 2007. Other global markets have been similarly volatile and ultimately weaker over the period, and these losses have been extended as we moved on into July.

The causes of the uncertainty have been well documented: What started as a problem in the US sub-prime mortgage market has broadened out and extended around the world. Banks and other institutions are finding that more and more of their assets are worth less than they thought and they have lost confidence in lending to one another. The resultant ‘credit crunch’ is affecting confidence and the ability of people who have borrowed money for fixed terms (for example for mortgages) to re-finance their loans when they mature. At the same time oil, many commodity and food prices have shot up and inflationary concerns are back on the agenda; indeed in those emerging economies more dependent on food, inflation is already a real concern.

Falling consumer and business confidence coupled with high oil prices is likely to see global economic growth slow down, which broadly translates into a deteriorating business outlook. Although analysts are still looking for healthy growth in most company earnings over the next year or two, the worry is that their forecasts are too optimistic and that they will have to revise down their expectations. The poor outlook for banks, property, construction and retail companies has already been reflected in very weak share prices. Portfolios invested in such high-income producing sectors of the market have seen the capital values of their portfolios fall heavily, a factor compounded by the rise in corporate bond yields as interest rate ‘spreads’ over government bonds have widened.

Meanwhile, one of the best places to have been invested has been in commodities – mining companies, oil exploration companies and other commodity plays – not a place one traditionally goes for income or for that matter low risk. However, due to their good performance these areas now account for close to 30% of the UK market.

As we have mentioned before, stock markets are a discounting mechanism for expectations and this is one reason why they have already been so poor – they reflect the fear that things will get worse, indeed a lot worse in certain sectors, before we move back into a sustainable and healthy growth phase.

Although this is not a good backdrop, there is a silver lining to this . . .

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The value of investments and the income derived therefrom may fall as well as rise and you may not get back the amount that you invest. Past performance is not a guide to the future. This material is directed only at persons in the UK and is not an offer or invitation to buy or sell securities. If investors are in any doubt of the suitability of an investment given their individual circumstances, they are recommended to contact an investment manager or independent financial adviser who may be able to provide tailored advice.

Update for 2008 | Outlook for 2008

Outlook – Second Half 2008

At the time of writing this report, markets are at their lowest levels since October 2005, sentiment is pretty poor, pessimism is abundant and the immediate outlook is still very uncertain! The volatility of share prices seems to have increased, even though that seemed unlikely six months ago when it was already high. The banking sector in aggregate is trading at its lowest levels for the last 9 years and the recent round of rights issues has met with mixed success (in terms of the percentage of take up by existing shareholders). Meanwhile, corporate bankruptcies in the USA are beginning to increase and that trend is likely to move over to Europe in the next few months. This suggests to us that it might not be a bad time to consider investing in the stock market!

Dividend yields are up (even in the banking sector because share prices have fallen by more than the dividends), most companies are still set to pay higher dividends in the year ahead and valuations are beginning to look very attractive.

Whilst the ‘private equity’ buyer has gone quiet, the corporate buyer with cash in hand might well be tempted to start getting involved buying other companies at these depressed prices.

Interest rates in the USA have been lowered in an attempt to inject liquidity and reduce the risk of a recession, but increasing inflationary concerns leaves official interest rates at 2% with little scope to fall further. In the UK, rates have been kept on hold at 5% since the modest reduction from the peak of 5.25% in April but some forecasters are expecting these to fall early next year. The main influence on policy here is inflation – if it can be kept under control, rates can come down. Recent statistics indicate that this is not the case just yet.

In our Outlook for 2008, written in January, we concluded by suggesting that it was still prudent to be cautious. With the current level of volatility and uncertainty in markets it is difficult to suggest that we are ‘out of the woods’ yet, but with share prices already quite a long way off their highs, there is at least a better chance of seeing capital growth from here. We would also expect dividend income to rise, thus income growth looks likely to continue (except from the UK domestic banks). Diversification of risk within equities as well as across asset classes remains advisable, as does our generally cautious tone, and I still believe that expectations in some quarters need to be moderated.

It is not going to be an easy year, but opportunities will arise for the patient, long-term investor who can hold steady through the current period of discomfort and high volatility.

The value of investments and the income derived therefrom may fall as well as rise and you may not get back the amount that you invest. Past performance is not a guide to the future. This material is directed only at persons in the UK and is not an offer or invitation to buy or sell securities. If investors are in any doubt of the suitability of an investment given their individual circumstances, they are recommended to contact an investment manager or independent financial adviser who may be able to provide tailored advice.

Lindsays Investment Department

July 2008

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The value of investments and the income derived therefrom may fall as well as rise and you may not get back the amount that you invest. Past performance is not a guide to the future. This material is directed only at persons in the UK and is not an offer or invitation to buy or sell securities. If investors are in any doubt of the suitability of an investment given their individual circumstances, they are recommended to contact an investment manager or independent financial adviser who may be able to provide tailored advice.