Every penny counts, it’s a competitive world!

The expected upward revision to UK’s fourth quarter economic growth was announced last week by the Office for National Statistis (ONS). Preliminary data, released in late January, suggested that UK’s economy grew by 0.1% in the final three months of last year; this figure has now been revised to 0.3%. This followed the news earlier in the month that inflation in January measured by the Consumer Prices Index (CPI) rose by 3.5% and by the Retail Prices Index (RPI) 3.7%. According to the ONS, the return of VAT to 17.5% and rising fuel prices were the major contributing factors. The Bank of England uses the CPI to set interest rates whereas RPI is often referred to in wage negotiations. A letter of explanation from Mervyn King, the Governor of Bank of England, to the Chancellor is required if the CPI is more than 1% above or below the Government’s 2% target. In his recent letter to the Chancellor, Mervyn King expressed his belief that the recent rise we have seen in inflation is only temporary and he predicted that it wil fall below the 2% target later in the year. As a result interest rates were left unchanged at 0.5% at February’s MPC meeting but it was decided to put Quantitative Easing on hold.

The rather lacklustre 0.3% economic growth that we have just received doesn’t seem a lot to show for what has been an unprecedented amount of stimulus an a significant devaluation of the Pound. What it does indicate is that the recovery is a fragile one and may still be reliant upon this stimulus. Any exit strategy, after the abundant liquidity in 2009, will need to be carefully planned and co‐ordinated in order to sustain the recovery and avoid the double dip recession that the UK Economy is still susceptible to. It is also important to be realistic, whilst the UK economy is now officially out of recession; we are still lagging far behind other developed world economies that saw a return to economic growth much earlier in 2009. This is a concern particularly as the UK is competing, in the absence of a high domestic savings rate, to attract international investors to buy gilts to fund its increasing debt burden.

Furthermore, after the debt issues facing Dubai late last year and the Greek sovereign debt issues that we have more recently seen, international bond investors are clearly scrutinising each country’s fiscal position far more closely. Abu Dhabi stepped in with a bailout that helped with the debt position in the Middle East and it is expected that similar assitance will be advanced to Greece by Europe. Unfortunately the UK does not have the luxury of such deep pocketed friends.

So the forthcoming General Election, still expected to be held in early May, may turn out to be a very significant event. A hung parliament is a real possibility as the current government gains

ground in the polls on the Tories despite the growing split between the Prime Minister and his Chancellor. The future health of the UK economy requires a trustworthy government with a majority and, most importantly, strong leadership. The monetary and fiscal medicine that has been administered so far is not a long term cure. What is required is a credible fiscal budget to reduce the UK’s deficit.

In an environment where the economy is growing, albeit at a lacklustre pace, inflation is above target, Quantitative Easing is on hold and uncertainty about the forthcoming General Election, the longer term outlook is one of rising gilt yields. With spare capacity in the economy the deflationary threat is still real and this may well temporarily provide support to giltprices. However, this will also provide bond investors with further opportunities to reduce duration and rotate to a more defensive stance as glt yields begin to rise. At North, we have constructed our own structured product to reflect our bearish stance on gilts within our portfolios. Whilst, it is difficult to directly sell short government bonds, the 10 year swap rate does provide a suitable alternative. Essentially we are looking to make a return of 12% per annum should 10 year gilt yields rise from their current level of 4% to 6% over the next five years, a return, for our investors, of £1.60 for every pound invested.

We may be negative on gilts, but the credit markets, in our opinion, still offer further value despite the increased levels of issuance and the equity like returns that we saw from this asset clas last year. With the banks reluctant to lend, many companies have turned to the credit markets to raise liquidity. The high yield market has been seen as a popular source of funding for many corporations. With fundamentals improving, spreads have tightened as default risk declines. We do, however, believe that we are nearer to the end than the beginning of this story and we are starting to shift our emphasis towards totalreturn bond funds that can hedge out duration and interest rate risk.

Outside of the UK, the theme of tightening liquidity is being played out at varying speeds. The World’s largest economy, the US, is preparing to withdraw Quantitative Easing as their recovery gains momentum. Whereas, in contrast, countries like China and Australia are now pursuing a policy of monetary tightening as their economies have quickly returned t previous growth rates and inflation is now rising. The importance of the economies of the Asia Pacific region and Emerging Markets to overall global economic growth continues togrow in importance as the West staggers along, weighed down by growing deficits. Today, the main threats to global

markets are the premature removal of stimulus in the West and/ or an overly aggressive policy of monetary tightening in the developing economies.

Investors are closely monitoring events and this year we have certainly seen a marked increase in volatility. This is what we describe as, a “risk on, risk off” market. The “risk on” market is characterised by a weak dollar and rising equity and commodity prices. Conversely, the “risk off” market is one where the dollar is strong and equity and commodity prices are declining. More recently, though, as attention has been turned to the Greek’s fiscal position and fears around potential sovereign default have increased, this relationship has broken down. The Euro has come under great pressure due to bailout of Greece and the prospect of having to potentially provide assistance t other member states. The US dollar has been the main beneficiary of these events. Yet despite everything equity markets have rallied back towards the levels when they started this year.

We said at the beginning of the year we wouldn’t be surprised to see the wider market move sideways in 2010. If the key word used to describe the events of last year was “unprecedented,” then the key word for 2010 would have to be “tricky!” That is not to say that you cannot make money in “tricky” markets, you certainly can, however, you need to look at this as “a market of stocks”, rather than a stock market. In this environment it is the stock pickers who will succeed as the distance between winners and losers begins to widen. There will also be good opportunity for those investors backing quality, stable companies with a track record of dividend growth. The current environment continues to support equity and commodity prices, however, be wary of becoming complacent. Look for opportunities to take out cheap insurances for portfolios to hedge against risks in the equity market, rising government bond yields, volatility and, of course, currencies movements.


John Husselbee
North
3rd March 2010

North Investment Partners Ltd is authorised and regulated by the Financial Services Authority. This document is directed only to persons who are professional investors, market counterparties or intermediate customers. Persons who do not fall within these categories should consult their independent financial adviser or other authorised intermeiary. The content expresses the views of the contributor and should not be construed as specific advice to individuals or as an entiement to invest in any of the strategies mentioned. Recipients of the document are reminded that investment may only be made on the basis of the information contained in the Prosectus relating to the particular Fund or Company in its final form and therefore this document must be read in conjunction withthe relevant Prospectus. The Offer is not being made directly or indirectly in any territory where its distribution is prohibited by law and copies of his document may not be distributed in or into any such territory. Issued March 2010.

Welcome to our News

This section will is used to inform you of items of industry news which we hope will be of interest.

Please scroll down to see the latest articles making the news at present.

Most recent press release for the OStCaRs

‘BEST IN BRITAIN’
ACCOLADE FOR
CORNISH FIRM

A leading Cornish firm of independent financial advisors has proved itself one of the best in Britain with official recognition at a prestigious national awards ceremony.

Truro and Penzance-based TMS Financial Solutions Ltd beat off some of the biggest names in financial services in the 2006 Compliance Register Awards announced at the Dorchester in London.

In only its second year of entry, the Cornish firm triumphed in the category entitled Best Compliance for Financial Services Firms.

“Last year we proved we could compete with the very best of them when we came second only to Standard Bank,” declared managing director Clive Gwilliam. “This year we have actually beaten the best of them! We have shown that even a relatively small Cornish firm can beat the giants when it comes to business integrity.”

Other household financial services names left in TMS’s wake included Virgin Money, HBOS, the Willis Group and New Star Asset Management.

Mr Gwilliam declared: “This is a classic David v Goliath triumph, emphatically demonstrating how a small company in Cornwall can give advice that is ‘London’ class but with a cosy Cornish local feel.

“What this achievement means is that we have been judged to be quite literally the most compliant firm – providing the very best and most comprehensive advice, complying with every conceivable aspect and requirement of cradle-to-grave financial advice for all our clients.”

The award was a great start to TMS’s 20th anniversary year. The firm was originally known by its founder’s name, Patrick Brewster, and became The Money Shop ten years ago, changing to its present name in September, 2005.

It has grown to its present level of 24 people, comprising ten independent financial advisors and 14 staff, and further expansion is planned this year.

As last year, TMS were shortlisted for the awards scheme after being nominated by lawyers Bond Pearce.

The awards are known as the industry’s OStCaRs – recognising people and companies giving Outstanding Service to Compliance and Regulation – and the scheme is run by the Compliance Register, the international organisation for compliance professionals and senior executives in the financial services and allied industries.

TMS’s prize – a bronze “Chinese warrior” statuette – was collected by Mr Gwilliam and Anne Sutton, the firm’s compliance manager. They were accompanied by Jody Jones, personal assistant to Mr Gwilliam.

Comedian Rory Bremner and singer Lynsey de Paul were among the celebrity guests at the Dorchester event, which was attended by 350 people from 14 companies and organisations from all over the UK.


For further information please contact Brian Steward on 01872 223377. Alternatively the website is www.tmsfs.com

Commercial Property - where to now?

DO YOU SEE WHAT I SEE?
JOHN HUSSELBEE IS AN INVESTMENT MANAGER BASED IN THE UK WITH OVER TWENTY YEARS EXPERIENCE IN THE MANAGEMENT OF FUNDS FOR RETAIL INVESTORS. THIS BLOG IS A PERSONAL VIEW OF FINANCIAL MARKETS BOTH PAST AND PRESENT FROM HIS SEAT IN THE FRONT ROW.
WEDNESDAY, 7 OCTOBER 2009
Property: Back to the first rung of the ladder
Over the years investing in commercial property has been seen as essential to providing diversification for an investment portfolio. This is an asset class that has traditionally provided investors with a good level of income and the potential for capital gains with relatively low volatility. However, for investors in UK commercial property it has been quite a different story over the last two years as capital values have almost halved since the peak of the market in mid 2007. With signs appearing that the global economy is now recovering, the outlook for property is now improving. Many believe that the property market is fast approaching the low point for this cycle. So is now the right time to start rebuilding property weightings in multi asset portfolios?

Investment in commercial property for most private investors is achieved via listed securities such as REITs (Real Estate Investment Trusts), property shares and closed ended funds. These provide investors not only with access to this asset class but also short term liquidity. Over the long term listed assets should deliver returns that are correlated to those an investor might expect from a direct investment in commercial property. However, short term, liquidity considerations may cause listed assets to act and behave in the same manner as the broader equity market and the share price of these vehicles may become significantly dislocated from the value of the underlying properties held within them. The global financial crisis in the last quarter of 2008 caused investors to dump all risk assets including listed property securities and we witnessed just such a dislocation, the average closed ended fund fell from a small premium in January 2007 to a 40% discount by December 2008 as investors scrambled for liquidity at any cost.

It certainly has been a torrid time for investors in commercial property but there is now reason for renewed optimism. Firstly, as a result of the significant falls in capital values the yield on commercial property has now risen to previous peaks. The yield now compares very favourably to the 10 Year UK Gilt yield, a key valuation measure for property investment. Historically, as the chart below shows, the yield on commercial property has traded at a 2% income premium over gilts. Inevitably gilt yields will have to rise as the Government seeks to fund the growing national debt, however, with property currently yielding around 8% and gilts ranging between 3.25% to 3.75%, this income premium is currently twice the long term average.

Source: Clavis Walden, IPD UK Monthly Index to 31st July 2009.

Another reason for optimism is the correlation of commercial property values with the growth of the economy. The daily news on the economic recovery continues to improve with nearly all of the major economies approaching the end of a short, sharp recession. Governments and their Central Banks have provided unprecedented levels of monetary and fiscal stimulus to stave off a downward deflationary spiral. Their goal of avoiding a deep depression is showing signs of being achievable and they appear to remain committed to a loose policy to defeat deflation and sustain the recovery. The chart below shows that historically the best time to invest in commercial property has been just as the recession is ending, a period when yields are peaking and investor sentiment is beginning to turn.

However this optimism should be tempered by a level of caution. Whilst we maybe close to or, at the bottom of the capital value cycle for property, the rental value cycle may still have further to fall. In a recession rental values typically decline as insolvencies rise, leases expire without renewal and break clauses are enacted. Furthermore, in this cycle landlords are being forced to lower rents on some properties to attract new tenants to occupy empty buildings which have had their relief from rates dramatically cut. Property specialists tell us that whilst the rate of decline in rental values has slowed, the vacancy rate could continue to rise.

The belief that we have reached the bottom of the capital cycle is based upon the assumption that the economy will continue to improve. As we have already mentioned, the UK Economy has been saved from Armageddon by unprecedented amounts of monetary and fiscal stimulus. There is now an expectation that the economy will resume growth in the next few quarters but this will come at a considerable cost. Government spending has increased and our nation debt, through the introduction of Quantitative Easing, has literally exploded. The traditional way to reduce the Nation’s real debt burden has been to inflate the economy and devalue the currency. This in turn will lead to sluggish economic growth over the next five years and the effect will be a slow recovery in property capital values. A final concern is of course the lack of bank lending. All of that being said, the potential upside that commercial property can offer investors at the moment does seem to outweigh the downside risks I have outlined above.

The recent buyers of commercial property have been overseas investors. They have been tempted by a capital correction in the UK that has been far greater than anywhere else in the developed world. These depressed valuations coupled with Sterling weakness have seen a whole host of international buyers knocking at the doors of UK property managers. The obligatory upward only rental review clause together with longer leases can create quasi bond type investment assuming the properties are let to quality tenants. There has also been renewed interest from UK institutions wanting to re-enter this asset class seeking to benefit from the wide yield premium over gilts. But as yet there is little evidence to suggest the retail investor is buying.

As investor sentiment has improved so has the trading environment and more importantly the liquidity conditions. Listed property securities have rallied strongly in line with the broader equity markets showing the same level of correlation that they did on the downside. The dislocation between share price and the underlying capital value is rapidly disappeared. The chart shows how the market weighted AIC UK Property sector has moved in terms of both share price and NAV (net asset value.) Share prices have bounced reflecting a sea change in sentiment whereas NAVs or capital values have merely stabilised. This bounce in share price is to be expected short term given that this sector has, over recent years, been more volatile and shown little correlation to direct commercial property. However, longer term we do expect the AIC UK Property sector to revert to displaying similar characteristics to those of the commercial property asset class once more.

Open ended funds, the traditional destination for most retail monies, have seen redemptions slow this year and the managers of these funds are no longer forced sellers looking for liquidity to pay exiting unitholders. We recently reviewed those funds ranked in the IMA Property Sector over two time periods: the period covering the fall from peak to trough of the cycle and the period covering the recovery to date. We discovered a clear division of returns between those funds invested in listed securities and non sterling assets versus those funds wholly invested in direct property.

Over the long term, property tends to be invested in for income rather than capital growth. Indeed, it is generally accepted that the majority of the long term gains are attributable to income rather than capital gains. It is hard to imagine that capital values can fall much further in a developed economy such as the UK, therefore, looking ahead the return on property will be dominated by income with a starting yield of around 8% but little capital gain in this rather sluggish economic growth environment. To maximise returns it is therefore important that private investors should review how they can most efficiently invest in this asset class. The introduction of REITs in January 2007 gave smaller investors a more tax efficient vehicle to access commercial property. REITs focus on property assets and do not pay capital gains nor income tax on the proviso that the majority of income generated is paid out to shareholders who then pay tax on their dividends. More recently we have seen the introduction of PAIFs (Property Authorised Investment Funds) which levels the playing field in terms of tax efficiency for open ended funds. Our understanding is that many existing open ended funds will consider converting to this more tax efficient structure.

So, we believe commercial property values are close to or at the bottom of the cycle. The change in investor sentiment is rapidly closing the distance between listed property securities and direct property assets. Those that fell the hardest in price have, generally speaking, recovered the quickest as liquidity conditions have improved over the last six months. What investors must ensure is that they select the right vehicle and the right manager to maximise their returns in the next stage of the cycle as there will be considerable dispersion of returns between the winners and the losers. Gearing which was the enemy of returns in a falling market will now magnify the gains in a rising market. There is an expectation that capital values will begin to rise and a vast amount of money has already been raised ready to invest in this asset class. We do not expect to see a rapid rise in capital values but investors should be attracted by the total return potential, driven predominantly by the yield, which significantly exceeds the current yield on government bonds and cash.

John Husselbee
5th October 2009

THIS ARTICLE CAN BE VIEWED TO INCLUDE CHARTS BY FOLLOWING THE LINK BELOW:

http://leadenhallstreet.blogspot.com/

Market commentary 21st September 2009

Tax and Cut
Autumn has arrived, bringing with it the start of a very interesting party conference season. With the General Election less than a year away the Labour Party will gather in Brighton later this month to plan how to win a fourth term in government after what has been quite an extraordinary year. The country has experienced the worst financial crisis since the Great Depression. A crisis which led to a near collapse of the UK banking system, took us into a severe recession and caused a sharp rise in unemployment. The Government’s remedy has been to flood the economy with liquidity in an attempt to stave off deflation and reflate our flagging economy. We saw interest rates slashed to historic lows last October, our banks effectively being nationalised and in the Spring the introduction of Quantitative Easing ‐ printing money. These unprecedented measures are now beginning to stimulate the desired green shoots of recovery. There will, however, be a heavy price to pay for a sustained recovery. We have already seen the pound being devalued and should fully expect to see inflation longer term as the National Debt builds. To balance the Nation’s books the taxpayer will be footing the bill with tax rises and cost cutting. Indeed, we have already seen this start:
• fuel duty has been increased by 2 pence per litre as of 1 September 2009, and will increase by 1 penny per litre in real terms each year from 2010 to 2013.
• the thirteen month reduction in VAT will end 31st December 2009 and then will return to the previous rate of 17.5%.
• from April 2010, an additional rate of income tax of 50 per cent will apply to income over £150,000 and the income tax personal allowance will be restricted for those with incomes of over £100,000.
• from April 2011, tax relief on pension contributions will be restricted for those with incomes over £150,000 and tapered down until it is 20 per cent.
If raising taxes is unpopular, then there is more to be lost on cutting public spending. According to this year’s Budget total public spending is expected to be around £671.4 billion this year, around £10,900 for every man, woman and child in the UK. The chart below shows how the budget is spent, with half of the money used to fund unemployment benefit and the National Health Service. It is unlikely that these two departments will suffer too much from cost cutting
with education and defence being the more obvious targets. There is already talk, in the weekend newspapers, of the Government’s plans to save £2 billion on education. It will not be long now before the Government begins to spell out exactly what cuts and savings they plan to make.
Whilst the governing Labour Party is looking to convince us that they deserve a fourth consecutive term in office, the Conservative Party will be seeking to regain the majority they lost in 1997. They will meet in early October in Manchester to plan how they will convince voters of their manifesto to replace the governing party. But this is a manifesto which will surely be unable to avoid increasing taxes and cutting public spending. For their part The Liberal Democrats will gather in Bournemouth and they too have been talking tax hikes and bold cuts. They will be hoping to take votes from both sides in the next General Election. Whilst they would, of course, ideally want to form the next government, a more realistic outcome would be to hold the balance of power in a hung parliament.
Whatever the outcome of the next election, there is no doubt that voters in the UK must now accept increasing taxes and cutting public spending as inevitable. The Party that wins will be the one that can convince the electorate that they are the most capable of making the right choices to sustain an economic recovery. This is a similar campaign to 1992 when the economy was in a
recession and against all odds the Conservative Government under the leadership of John Major managed to retain power. This time round trust and confidence will be the key factors determining who takes the keys to No. 10. The MPs expense scandal tarnished the reputation of parties on both sides of the House. Whilst Party leaders urged their members to put right any wrong doing, the integrity of our politicians was delivered a severe blow. There have already been many casualties and no doubt there will be many more when MPs stand for re‐election next year.
The next general election must be held on or before Thursday 3rd June 2010, with the present parliament expiring at midnight on 10th May 2010. Local elections take place on 6th May 2010 and some have suggested that the general election may also be held on this day. The best outcome for the economy would be a majority allowing tough choices to be made in the early term of a new government. The worst outcome, and one commentators are beginning to talk about, is a hung parliament which could potentially have a disastrous effect on the British economy.
The outcome of the next election will shortly become a concern for investors. Stockmarkets are forward looking and will be impacted as investors fears increase about what will happen in the future. The rally in the market which started in early March was based upon the perceived outcome of the recovery plan rather than any real green shoots. This rally gathered momentum with the concerted efforts of governments and central banks around the world, as well as the announcement that a policy of Quantitative Easing was to be introduced. It is unlikely that the authorities will begin to withdraw the liquidity supporting the global financial markets anytime soon. To do so too early would risk the recovery and prolong this recession.
The most visible measure of liquidity is interest rates. We believe interest rates will remain low for some time. This might be a delight for those with mortgages and high levels of debt in employment but is bad news for savers. They are still being forced into risk assets as they seek greater returns than they can achieve on their cash deposits. The excess premium yield on corporate bonds compared to ten year gilts remains attractive. Perhaps the “once in a generation” value that we saw in corporate bonds at the beginning of the year has now started to disappear but there is still plenty of value to be found at this stage of the credit default cycle. With the lack of willingness by banks to lend, many companies are turning to the bond markets
to raise cash. Most bond fund managers we have spoken to lately are increasing their exposure to the high yield market as the default cycle starts to peak. In this sector the key to generating superior returns, in the future, will lie in picking the right credits and having the right tools to reduce maturity and interest rate risk. For us this is best found through strategic bond funds that can employ a flexible approach.
Aside from the credit markets, UK equities are also offering a generous yield premium to ten year gilts. Whilst there is some uncertainty over dividends, there is the potential for capital growth. The more secure dividends are to be found in the larger companies, however, there is a danger that the market ignores these income stocks in favour of growth. Whilst, the economy is showing signs of a recovery, future growth will be muted as households, corporates and the government reduce debt. Companies have recently improved profits, but this has been more as a result of cost cutting as opposed to growth of revenues. Unemployment and consumer confidence always lag in a recovery and we see no reason why it should be any different this time. If this is the case, then growth companies which can outpace the economy, will be the favoured ones. In this type of market buyers focus on growth rather than valuation. In this environment value managers will underperform.
This focus on growth has also been highlighted by the difference in the equity returns from Developed and Developing Markets. The West has been constrained by increasing debt and the prospect of higher taxes and fiscal tightening. On the other hand, Developing Markets, particularly those found in Asia Pacific and Latin American regions remain in a stronger fiscal position as they are able to fund future growth through savings. This division looks set to widen further as we witness the gradual wealth transfer from West to East. The next ten years will see this trend accelerate as the least indebted nations maintain their growth path. Our current preference is for the BRIC countries (Brazil, Russia, India & China) which have strong momentum in growth and maturing economies. These are also the countries which Goldman Sachs believe will have the biggest impact on the global economy in the future due to their strong population growth coupled with their open markets.
The continued growth in Developing Market economies also supports commodity markets, but at the same time weakens the US dollar. The thirst for energy and industrial metals will drive prices higher in the long run. The oil price has risen to the US$70 level which is less than half its
price last summer. The increasing burden of debt and the fact that US investors are now looking for better value overseas is weakening the US dollar. A gradual slide in the US Dollar will suit the authorities as it will reduce their debt and encourage exports. However, with the consensus forecasting that interest rates will stay lower for longer, there is a danger that the US Dollar will become the carry trade currency as the Japanese Yen was in the last bull market. This weakness, coupled with the long term fear of inflation has promoted Gold as a serious alternative for those wishing to diversify away from holding US dollar assets.
In my experience as an investor for over twenty years, there are many times where you have to hunt for opportunities, but this is not the case in today’s markets. Central banks and governments have stated that they are maintaining their loose monetary and fiscal policy stance to insure that the recovery is sustained. Withdrawing liquidity gracefully when the economy is back on track is only a future concern rather than an immediate problem. All this is very supportive for risk rather than risk free assets. We do not wish to imply that it will be plain sailing from here on out as there are still many clouds on the horizon, but it is fair to say that we can see a silver lining. It is quite understandable that for many investors, just a year on from the beginning of the credit crisis, their main thoughts are still on how to avoid losing another 10%. For us, it is about thinking about where we can make the next 10%!
John Husselbee
North
21st September 2009

Market Commentary 14th July 2009

“Show me the Money!”
Jerry Maguire was the 1996 American film starring Tom Cruise which remains popular today largely due to its memorable quotes. In the film, Cruise plays Maguire, a sports agent who is attempting, with limited success, to secure a major contract for his American Football playing client, Rod Tidwell (Cuba Gooding, Jr.) During a telephone update on his contract negotiations the exchange gets somewhat heated and culminates in a frustrated Tidwell shouting repeatedly at Maguire “Show me the Money!”
After three months of an extraordinary turnaround in equity markets, investors are now yelling “Show me the Green Shoots” at the market in a similar style to Tidwell. Although, it now seems pretty unlikely that the world economy will experience a recession of the magnitude of the Great Depression, the recent rallies in credit, equity and commodity markets have stalled signalling that buyers are currently exhausted and maybe not be quite so optimistic about the future. The concept of “less bad” can only carry markets so far. The strong gains in the second quarter of this year have served to return valuations closer to fair value from the worse case scenario. From here on in, it would seem that the markets are now demanding firm fundamental evidence of the economic recovery.
So does this current stall represent a pause or a sign that markets will turn back and we will see the next leg down in this bear market? In terms of valuation, equity prices and credit spreads are now at levels usually associated with a recession rather than a slump or a depression. In terms of the fundamentals there are signs of improvement in the global economy, most notably in China, the rest of Emerging Asia and the resource markets. Elsewhere, economic recovery is definitely more subdued and perhaps rather suspect supported by the helping hand of governments. The mass of liquidity created by both monetary and fiscal stimulus has been the key to avoiding a depression up until now; however, this has all come at a cost. It will be critical to the recovery that governments continue with a loose money policy for as long as required but then tighten again before inflationary pressures reassert. This formidable task, in the opinion of bond markets, is asking too much of government officials and government bond yields have consequently been rising in recent weeks.
For now it appears appropriate to be cautiously optimistic about the economic recovery. As we have often said statistical and economic data releases have a tendency to be backward looking, generally because of the time needed to collate, verify and then release data. For a more forward looking view, surveys are often used, although sentiment indicators should usually be interpreted as a contrarian view. For example, survey data about new orders in the US is currently showing an up turn which in the past has tended to correlate to a positive change in employment figures. This is a positive sign after last year’s collapse in demand, which saw companies quickly de‐stock and shed labour. New orders should translate into increases in industrial production, further employment, rises in both corporate and personal income as well as a recovery in consumer demand. Of course, there is the danger always remains that the consumer will prefer to save rather than spend.
We believe that these markets will continue to be driven by fear as investors weigh up the fear of being in the market versus the fear of being out of it. It would not be a surprise to see the markets move sideways whilst investors continue to grapple with their emotions. On my desk I have, in recent weeks, collated economic research which can evenly be distributed between the bull and bear case. The arguments put down by both sides are fairly well balanced. This crisis was caused by the scarcity of credit and this is gradually improving day by day through effective government policy. As we have already said a number of surveys are showing signs that the fundamental data is improving. However, this is countered by concerns that economic growth will disappoint next year and markets are now trading at or near fair value.
The strategy in a market that moves sideways is not as clear as the one adopted in a trending up market. The cyclical driven equity rally has created opportunities for managers to carry out a tactical summer rotation in their portfolios. The rise back to more realistic valuations has been achieved and we believe the key to future returns will be relative value so stock selection will be vital. Small and mid cap stocks have outperformed their large cap counterparts, to switch now to large caps may provide the best relative returns in these volatile markets. We will now use periods of weakness to build our equity exposure once again. We favour the growth markets of Emerging Asia and resources for the long term. Finally, there are no early signs of inflation as unemployment continues to rise coupled with the recent declining commodity prices. Therefore, printing money will continue to support the corporate bond market for the present. Whilst, we have seen vast amounts of money flow into this asset class and effective de‐leveraging in the sector, we remain bullish on this asset class.
John Husselbee
North
14th July 2009
North Investment Partners Ltd is authorised and regulated by the Financial Services Authority. This document is directed only to persons who are professional investors, market counterparties or intermediate customers. Persons who do not fall within these categories should consult their independent financial adviser or other authorised intermediary. The content expresses the views of the contributor and should not be construed as specific advice to individuals or as an enticement to invest in any of the strategies mentioned. Recipients of the document are reminded that investment may only be made on the basis of the information contained in the Prospectus relating to the particular Fund or Company in its final form and therefore this document must be read in conjunction with the relevant Prospectus. The Offer is not being made directly or indirectly in any territory where its distribution is prohibited by law and copies of this document may not be distributed in or into any such territory. Issued July 2009.

Nursing and Residential Care

No matter how much you plan, nobody plans to go in to care. It is often the last thing anyone wants, however, sadly it is out of our control.
The cost of care is significant and is far to often financially damaging resulting in a large part of a persons wealth being used to fund their final years in care. Many people plan to protect assets from being eroded by Inheritance but far less bother planning for their long term care.
Furthermore the benefit system in this country is complex and many need guidance as to their entitlement to state aid.
At TMS we are fortunate to have 2 advisers specially qualified on the subject of long term care and experienced in giving advice in this complex area.
The following links are helpful in giving further information and guidance:-

More Information

More Information

For further advice please contact Jane Coomer on 01872 223377 or Hilary Pryor on 01736 366355