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Market Bulletin
MONDAY 4 APRIL 2011
Email: mark.burch@sjpp.co.uk
This weekly Briefing Note aims to pick out some of the key
financial and economic issues touched on in the press over
recent days and from time to time includes the views of
some of our independent fund managers.
Markets Spring into Action
Global equity markets enjoyed one of their best weeks
since last month‟s horrendous earthquake in Japan,
enabling key indices to close near or at two-year highs and
meant overall markets had one of their best quarters‟
performance for more than a decade. Boosting sentiment
was news of better US employment data, coupled with
receding geopolitical fears. “Fading concerns over potential
global growth risks from turmoil in the Middle East
spreading into major oil producers as well as reduced fears
of a more serious fall-out from the nuclear crisis in Japan
led to a pick-up in global risk appetite last week” was the
view of RBC Capital markets. Whilst investors may have a
spring in their step, the week was not without a few
niggling worries – the eurozone sovereign debt crisis
remained in focus and oil prices continued their seemingly
inexorable climb with Brent crude rising three dollars to
end the week at almost $120 per barrel – a new twelve
month high.
But first the good news. Wall Street took heart from the
latest US Department of Labor data which found that the
jobless rate fell to 8.8% in March (its peak was 10% a few
months ago) while non-farm payrolls jumped by 216,000;
the largest monthly gain since last May. The employment
figures were stronger than expected, with growth recorded
in the healthcare, hospital and mining sectors –
manufacturing saw a more muted increase and government
payrolls fell 14,000. Economists believe the figures add
further credibility to the view that America‟s economic
rebound is gaining momentum and is sustainable. The
employment numbers were one reason that oil prices
climbed – a belief that industry will need to consume more
energy. Against this back-drop equity prices advanced
steadily with the Dow Jones index coming within a whisker
of a two-year high and the broader-based S&P500 index not
far behind.
However there are some who are worried that stocks may
have got ahead of themselves, despite the undeniably better
economic data over recent months. According to The
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Financial Times data, the S&P500 has doubled from its
March 2009 nadir and now trades on a multiple of about 24-
times average earnings for the last decade – its long-term
average is 16. Rising
confidence has seen US companies return to strategic deal
making which in turn has boosted global mergers and
acquisitions and with it, share prices. M&A activity grew by
26% in the first quarter of this year and the US accounts for
half of all deals, suggesting confidence among US chief
executives and boards, has bounced back faster than elsewhere.
Writing in The Sunday Telegraph, Fidelity fund manager
Tom Stevenson pointed out that the American index has
outperformed the FTSE100 (by about 16%) since last
September despite both economies facing similar difficulties.
Are prices justified? Well, he noted that all will be revealed in
just a few short weeks as America‟s companies release their
much-awaited first quarter earnings figures. Mr Stevenson
noted that the US economy has benefitted from the huge boost
of cheap money and lower taxes – policies pursued by
President Obama. Despite higher oil prices it is likely that US
companies will once again be healthily positive and he
concluded that investors‟ sanguine response to March‟s
upheavals looks rational.
More Money Please
There are those though who think the US economy is heading
for trouble. Economist Liam Halligan, also writing in The
Telegraph, thinks that America‟s economic „sugar rush‟ will
end in a serious financial headache. His view is predicated on
the fact that euphoria on Wall Street is being fuelled by the
spectre of more quantitative easing (QE) and tax cuts the
country can‟t afford. The US Federal Reserve is currently in
the middle of a second round of QE - $600bn – due to expire
at the end of June, adding to the original $1,700bn programme
already completed. This huge flow of cheap money has boosted
asset prices but also antagonised the likes of China who have
seen the value of their dollar-based investments (they own a
huge slice of America‟s treasury bonds) devalued. Xia Bin,
long-standing adviser to China‟s Central Bank, recently wrote
that “As long as the world exercises no restraint in issuing
dollars, then the occurrence of another crisis is inevitable”. For
now though, investors are giving Fed Chairman the benefit of
the doubt, taking the view that there will be an orderly exit
once QE2 has expired.

And talking of pumping more money into things – the Irish
government announced that following another round of
stress-tests for its beleaguered banking system, it would
inject another €24bn of capital into the sector. This is the
fifth attempt to draw a line under the Irish banking crisis,
according to The Times, and will take the total amount
pumped into lenders to €70bn. The plan will see the sector
restructured into two major players. Following the news,
Bank of Ireland looked to be the winner – its shares surged
40% - whilst traders dumped shares in other banks heading
for nationalisation, such as Irish Life & Permanent.
Rate Rises for Euroland?
There is also the ongoing view that it is only a matter of
time before the eurozone sovereign debt crisis claims
another victim – this time Portugal is expected to step up
and ask for more money to be pumped into its ailing
government finances. “There is no doubt that the debt
situation in Portugal is rapidly getting worse. With
Portugal facing bond redemptions of about €9bn in April
and June this year, the need for a bail-out seems more and
more certain” said Swiss & Global Asset Management.
However, expectations that the European Central Bank
(ECB) is poised to raise interest rates helped support the
euro, despite Portugal‟s woes, as investors‟ attention was
diverted. After two years with rates at a record low of 1%,
the ECB is expected to announce a quarter-point rise this
Thursday – despite fears that this could tip some countries
back into recession.
Jean-Claude Trichet, president of the ECB, has taken a
hawkish stance, saying last month that the bank would
show a “posture of strong vigilance” against rising inflation.
Inflation has risen to 2.6% across the region because of
rising commodity prices. But with Europe experiencing a
two-speed recovery the move could tip the likes of Spain
back into recession think some economists. News that
unemployment fell for the fourth straight month in
February, falling below 10% for the first time since 2009,
whilst welcome, masks what has been an uneven recovery
with core countries such as Germany racing ahead of the
struggling peripheral ones such as Greece.
Mixed Momentum
Elsewhere there are mixed messages emerging from global
economic activity. It came as no surprise that the first
release of Japanese economic data since the March 11
earthquake devastated the country‟s north-eastern seaboard
offered markets an unsettling glimpse of a mighty
manufacturing sector in terrible distress. Activity as
measured by the purchasing managers‟ index plunged 6.5%
- its worst fall since surveys conducted by data company,
Markit, began a decade ago. There are also worries that the
figures could be worse, as the survey was based on far
fewer responses than usual, implying that the very
companies worst affected failed to respond. Equity
investors appeared to take a sanguine view though, focusing
on the longer-term benefits of reconstruction which
helped support share prices: the Nikkei 225 index advanced
almost 2% on the week.
Here in the UK, economic recovery momentum is mixed. The
manufacturing sector slowed last month with new orders rising
at their weakest pace since last October according to the
Markit/CIPS Manufacturing index. With 19 months of
consecutive input price rises manufacturers are trying to pass
these on to buyers, accounting for the fact that selling prices
surged to new highs. However, notwithstanding the latest
data, the overall reading for industry was well above its long-
run average and showed that manufacturing, with a reading of
57.1, was still firmly in growth territory. In the service sector
there was welcome news that output recovered from
December‟s weather-induced setback. The largest part of the
economy grew 1.3% in January according to the Office for
National Statistics (ONS) and the pick-up in services activity
raise the possibility that first-quarter growth will be back on
track. Not that it will be plain sailing – UK households suffered
their first drop in income for 30 years last year, as rising
inflation bit deeply into finances, according to the ONS.
Buy British
According to one of the UK‟s most successful fund managers,
Neil Woodford of Invesco Perpetual, British companies are
offering some of the best investment opportunities in 10 years.
Talking to the financial press over the weekend, Neil
Woodford explained why he felt now was the time to buy
British, even though he is gloomy on the outlook for Britain‟s
economy. Having resolutely eschewed owning technology
stocks during the late nineties, Mr Woodford also avoided
banking stocks in the run-up to the financial crisis and he is still
negative on the banking sector because of continued worries
over their balance sheets.
Today he is also avoiding mining stocks, preferring to own
pharmaceutical companies. “The biggest negative contributor
to my performance has been holding pharmaceuticals and the
biggest attributor has been not holding mining shares. I‟m not
going to compound that error by moving to mining shares.
These companies are generating supernormal returns on the
back of supernormal commodity prices and I don‟t believe
those prices are sustainable” he said. Mr Woodford believes
that pharmaceutical stocks offer extraordinary value. “I‟m
actually looking to increase my exposure to this sector
[currently 25%] because this reflects the degree of conviction I
have in it . . . there have only been a few occasions in my 25-
year career where I have seen the opportunities that I now see
in the pharmaceuticals sector. Valuations are depressed even if
you discount no further innovation or new drugs coming to the
market” he said.
Neil Woodford is not alone in liking British shares it seems.
According to recent data from Capita Registrars, private
investors have upped their holdings of shares to a three-year
high – it means that the share of UK plc held in retail hands
stands at 11.8%, its highest level since summer 2009.
Neil Woodford manages funds for St. James‟s Place Wealth
Management.
Members of the St. James’s Place Wealth Management Group are authorised and regulated by the
Financial Services Authority.
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