Quarterly investment commentary – second quarter 2010

We’ve written this commentary assuming you have some experience of investing in shares. This means that although we have tried to write as much as possible in plain language, we may have used certain words or phrases that might not be familiar to anyone new to investing. If there’s something you don’t understand, please contact your adviser. It is not an offer to buy or sell any investments or shares.

A risk-averse quarter for financial markets

Following the gains seen in the first quarter, financial markets globally experienced more difficult conditions over the three months to the end of June. At the forefront of investors’ concerns was the Greek debt crisis and resultant contagion to other heavily indebted members of the eurozone. Along with the Greek authorities, governments in Spain, Portugal and Italy have introduced a series of austerity measures, while in early May the EU and IMF agreed a joint bail-out package for Greece. Measures to rein in government borrowing have also been set up in the core eurozone economies of France and Germany, and the euro has weakened.

In the UK, the May general election resulted in a coalition government and on 22 June the chancellor delivered an emergency budget containing spending cuts and tax hikes, including a rise in VAT to 20% from January 2011. However, corporation tax is being cut to 24% by 2014/15. The rating agencies have stated that the budget was supportive of the UK’s AAA credit rating. Overall, the budget was well received by the market and sterling strengthened.

The sheer scale of government borrowing in peripheral eurozone economies has prompted concerns over European banks’ exposure to these countries' sovereign bonds. Towards the quarter-end, the cost of insuring against a possible default on Greek bonds reached a record high. Sentiment was also undermined by signs that the frenetic pace of Chinese growth was easing following moves to contain bank lending and cool the property market. Also, the sluggish recovery in western economies is restraining Chinese exports.

Although equity markets have fallen back from the highs seen earlier this year, they remain well above the lows of March 2009. Investors in equities and corporate bonds have been encouraged by the sharp improvement in company profits, following extensive cost cutting in the economic downturn and subsequent inventory restocking. Indeed, yields on both equities and corporate bonds remain significantly higher than the returns on cash deposits. Company news was generally upbeat, although shares in BP fell sharply in the wake of the oil spill in the Gulf of Mexico and associated clean-up costs. BP has cancelled its dividend payments for the rest of 2010.

Leading government bond markets have benefited from increased risk aversion and the flight to quality, with the result that yields have fallen. The fiscal austerity measures introduced in many developed economies have met with a positive response from sovereign debt markets. In the UK, the budget deficit is forecast to fall from £149bn this year to £20bn by 2015/16.

This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 June 2010.

We’ve sourced these index figures, in sterling terms, from Financial Express to 30 June 2010. The indices mentioned above are measures of the markets they represent. For example, the FTSE All-Share Index represents 98-99% of the UK market. It is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices.

You shouldn’t take past performance as a guide to future performance or as the main or sole reason for deciding to invest. It may have been achieved in a more favourable economic period that may not happen again, and tax conditions are unlikely to be the same. We don’t guarantee the value of your investment and any income, both of which can go down as well as up.

A long-term commitment

We believe it’s important, where possible, to take a long-term view when investing. Looking back over the years, volatility has always been a feature of world stock markets, with each setback followed by a recovery – some taking longer than others. The usual way to deal with volatility is to invest for the medium to long term – a period of at least five to ten years.

It’s important to find the right product and invest in the right funds, and this depends on your investment objectives and attitude to risk. If either has changed, your adviser will help you review your investment to make sure it continues to meet your needs. Although we don’t give investment advice, we do offer a wide range of funds suitable for almost all investment objectives and attitudes to risk.

We strongly recommend you speak to your adviser before making any changes to your plan.

July 2010