Every month, Allenbridge holds an investment committee meeting comprising of investment strategists and economists, unit trust experts, hedge fund specialists and senior executives. It looks at the trends it expects in markets over the next months. These help to form Allenbridge's strategy both for clients generally and for the funds it manages.
From this month onwards, Allenbridge will share the results of these meetings on a regular basis with the media.
Here are the findings of the April meeting.
We have had very strong returns from corporate bonds over the past month or so, as spreads have narrowed when Gilts were slightly weak. There is still some money to be made here, as if you believe in at least a modest recovery, spreads are still higher than equilibrium.
In currencies, Sterling is showing signs of life, appreciating against the US Dollar slightly over the past month. The USD has recovered a little against the EUR, mostly due to concerns over Greece.
Equities have continued rising, testing new short-term highs. We had a sell-off in June last year, and then another in January and now we have had another extension to the rally, so this is really the 3rd upward leg of this recovery. Equity and credit markets look like they may have gone a bit too far in anticipating the recovery.
Profit reports from companies are pretty good. However, in the USA this does not necessarily translate into much rehiring of labour. They sacked labour pretty quickly and as a result won’t be too anxious to rehire.
Crude oil has currently levelled off at around $80. BP continues to use $60 to $80 as their planning assumption for the next 5 years, so markets seem to be slightly ahead of that. Property has been very strong in March, with huge rises in capital values, collapses in yields and reduced stock in the commercial property market. The UK housing market also continues to recover.
David Blanchflower, former member of the MPC, is pessimistic on the current economy. He still believes in a double dip, and believes that the Bank of England doesn’t have much of an idea of the effect of QE or how to reverse it. He also believes that the outlook is so depressed that base rates will stay low for up to 5 years, and it’s too early to cut public spending and raise taxes.
While it is unlikely that base rates will remain low for the next 5 years, they are likely to stay at current levels at least for a while. This means that yield curves will remain steep, which is good news for banks as it gives them the opportunity to rebuild their profitability.
There are more positive signs coming through. US employment data has been better than expected for the past few months, retail sales are picking up, and confidence indictors are at the best they have been for a long time. We have been saying that the only drivers so far have been inventory rebuilding and fiscal stimulus. The weakness has been the lack of domestic demand through the traditional motors of business investment and consumer spending. Because we got that increase in inventory spending, the net exporters of the world like Japan, Germany and China got quite a strong turnaround last year. The consequences of a lack of domestic demand would mean that those economies may slow again. Blanchflower’s view is that you would only start to remove support when you have evidence of the sustainability of recovery in domestic demand, which he would argue that we haven’t got there yet.
We would like to see more strength in consumer and investment spending. Investment spending is typically a lagged indicator, unless there is a strong rebound in exports. In UK we may have that now, as the GBP is more competitive and the recent news in terms of manufacturing order books is pretty positive. So the outlook for the UK doesn’t look as gloomy as previously thought, which makes the budget deficit numbers look a bit better.
We had a very strong February for the monthly budget deficit figure, which has led to a lowering of expectations for the year from £167 billion to around £150 billion. Natwest and RBS have now gone past the government support price, so if that carries on they can sell off their holdings which should make a dent. The key factor that drove deficits up was the collapse in tax revenue, and not that public spending had got out of control.
Looking forward there isn’t much between the two main political parties. The current chancellor’s target is to half the deficit over the next 3 or 4 years from 11% to about 5.5%. The challenge is to eliminate the structural deficit all together, i.e.: The deficit that would remain if there wasn’t a business cycle. None of the parties has really come up with a proposal which they have committed to that will deliver on that.
Inflation shouldn’t be a serious concern at the moment, and we should be more concerned on dampened economic growth. Wages growth is subdued, especially in the public sector where the government has capped growth to 1%.
We are in strong positive territory for the year across markets and seem to be in a sweet spot for risk assets, and everything is looking bullish. The worry is that there is not enough underlying economic support, so may experience some choppiness in the near-term. In the UK, this could be provided by the upcoming elections with the prospect of a hung parliament.
Best performers YTD (29th Mar 2010):
Worst Performers YTD (29th Mar 2010):
Hedge funds on the whole had a good month is March, following on the trend in other markets. Performance had been flat or negative up till February, with practically all YTD performance coming in March.
Hedge funds have been sold on the basis that they offer uncorrelated returns to other asset classes, which is not always the case. Investors need to be re-educated in how they view hedge funds, what role they need to play in the portfolio, and how they are selected.
There are essentially 2 reasons to invest in hedge funds:
For hedge funds it is quite rare that they are being run without any key-man risk. For this reason a lot of due diligence is required. For the riskier managers, smaller allocations should be kept; up to a maximum of 3% in portfolios.