Market commentary - April 2008

Market commentary - for the period October 2007 to April 2008


UK Equities (FTSE All Share Index -8.7%)

The UK economy is losing the support it has traditionally received from the housing market, the financial sector and Government spending. The Office of National Statistics noted that the UK’s GDP grew by 0.4% in the first quarter of 2008 (2.5% year on year) which was the slowest advance since 2005. The housing market is losing momentum and although there is a structural shortage of housing supply, this does not mean that house prices will not continue to fall. The current credit crisis is likely to mark a sea change in economic fortunes for the West with a peak in higher levels of consumer borrowing. This could mean that for the first time in thirty years, we have a consumer who no longer wants or can afford to take on more debt. Shares still look cheap on valuation measures for investors willing to take a medium term view although there is little confidence in earnings (profit) expectations in the short term. Banks are starting to recapitalise through rights issues and are pushing up mortgage rates to enhance the interest rate differentials they require on their investments. Companies with strong cash flows and generally lower debt to equity ratios than their peers should be best placed to weather the storm and those tend to be the larger companies in the FTSE 100 index. House builders, retailers and the banks in particular have suffered substantial price falls during the period and less than a quarter of stocks in the FTSE 350 have produced positive share price returns. Clearly, there has been some indiscriminate selling across the board and it will take some time for the market to recognise the stronger and better quality companies. IFPC have oriented the holdings of funds and direct equities towards these companies whilst retaining low weightings in the FTSE 250 and UK Smaller Companies indices. The markets are now focussing on rising inflation particularly through rising energy and food prices, neither of which can be controlled by the Government and hence we have not seen deeper cuts in UK interest rates so far.

International Equities (FTSE World ex. UK -6.5%)

Economic data in the U.S. deteriorated during the first part of 2008 with the first signs of weakness in the US jobs market. The Federal Reserve has been very active in financial markets cutting interest rates by 0.75% in one day and allowing banks to swap some of their lower quality mortgage bonds for high quality Treasury securities. The U.S. is further into an economic slowdown than in Europe and is likely to emerge first in a recovery. IFPC is looking to increase weightings in the U.S. starting from a low base particularly as the dollar has recently been strengthening against sterling providing some valuable currency benefits on translation back to sterling.

In Europe, previously resilient export growth in Germany has started to slow and the scale of pay rises is becoming a concern to the European Central Bank who will look to raise rates in the future to fight inflationary pressures. Business sentiment is weakening in France whilst elsewhere, there are problems in the Spanish property market and a weak economy is leading to political instability in Italy. The Euro has strengthened considerably against both the dollar and the pound which may lead to slower economic growth going forward but providing currency benefits for sterling based investors.

Although Japan should be benefiting from it’s relatively sound banking system, there is little evidence of an increase in it’s anaemic growth rate. The Yen is showing signs of strengthening and is providing enhancement of returns through conversion back into sterling. The markets of China and Asia remain the bright spots of global markets and economic fundamentals should remain relatively immune from the events in the credit markets of the U.S. Although inflation and rising interest rates are a concern, economic growth rates should continue at healthy and manageable levels. IFPC will increase weightings in this region when the opportunities arise. Global Emerging Markets are underpinned by a mixture of oil revenues and infrastructure spending and portfolio allocations in these regions will likely become a more permanent fixture in the future.




Fixed Interest (FTSE British Govt All Stocks +4.7%)

Government bonds currently offer low nominal returns at 5.21% yields but have delivered protection of capital against the backdrop of volatile equity markets. Gilts have produced positive returns of 4.7% during the period although it is unlikely that this asset class will offer competitive expected returns in a rising interest rate and inflationary environment.

The expected future returns on corporate bonds relative to government bonds has increased over the last year and the market is now offering some healthy opportunities for yield (approximately 1.75% above a gilt return for a single ‘A’ rated bond compared with a gap of only 0.8% at the beginning of last year). Capital values have generally declined over the last couple of years but the income stream continues to support cash balances.

Commercial Property (FTSE All UK Property -10%)

It has been a poor year for the UK commercial property asset class and we continue to see further write downs of net asset values. The slowdown in consumer spending is also creating downward pressure on rent reviews in the retail space. High borrowing levels have impacted on many property companies. IFPC has generally avoided this area over the last year and we await for signs of a turnaround before we consider increasing our weightings towards this asset class.

Alternative Investments (FTSE Hedge Sterling Daily -4.4%)

Our construction of investment portfolios will increasingly incorporate investment strategies with hedge fund style characteristics (approximately 5-10% of the portfolio’s assets). IFPC currently access these funds through the strictly controlled UCITs III regulations which demand high levels of FSA regulatory control. These are highly sophisticated investments but provide opportunities for fund managers to benefit from both rising and falling share prices.

Commodity prices remain strong with gold touching $1000 an ounce at the beginning of the year and Goldman Sachs has recently set an oil price target topping $200 a barrel. The majority of the funds we invest in have a healthy exposure to commodity based companies and this sector has offered good returns over the period. As valuations increase and prices become increasingly volatile there is a suggestion of a more circumspect approach towards investing in this sector. However, strong demand from industrialising nations is likely to remain a recurring theme for many years to come.

Soft commodity prices have been rising exponentially over the last year particularly in corn, wheat and soybeans to name a few. Prices are rising due to recent supply problems from bad weather, demand from Asia and the demand for the inputs in the production of bio-fuels.

Shopping bills in the UK are already rising as a consequence but a greater impact is being felt by those nations that require soft commodities as a staple diet causing social unrest and political demonstrations. As agricultural land is opened up for investing, it is likely that the demand for the ‘picks and shovels’ of agriculture such as combine harvesters and tractors will rise. IFPC are purchasing Agricultural based funds (where appropriate) to increase exposure to the asset class.


IFPC is authorised and regulated by the Financial Services Authority

Source of statistics: Lipper Hindsight and Sharescope Alpha

Disclaimer: this document represents investment commentary of a general nature and should not be used as a basis for making personal investment recommendations. It does not take into account investment objectives of a personal nature and you must contact an adviser at IFPC if you require further financial advice.

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