Quarterly investment commentary – second quarter 2008

We’ve written this commentary assuming you have some experience of investing in stocks and 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 you don’t understand any part, please contact your adviser.

Financial markets hit by economic woes

The second quarter was a poor period for the world’s financial markets. Initially, equities continued their rally which began in mid-March following the rescue of US investment bank Bear Stearns. However, after moving ahead in April markets reached their peak for the quarter in mid-May before falling back amid concerns over mounting inflationary pressures. The latter is a global trend as energy and food prices have been pushed higher by the growth in demand, mainly from developing economies such as China and India. There has also been competing demand for foodstuffs for use in biofuels. At the quarter-end, the price of oil reached a record high of over $140/barrel and concerns have grown over the adverse effect of higher energy prices on the world economy.

At the same time that inflation has been rising, the pace of global economic growth has continued to slow. In the UK, this has triggered fears of stagflation, whereby higher inflation is accompanied by sluggish economic activity.  The Bank of England recently warned that UK consumer price inflation will probably exceed 4% in the coming months. There are also fears that leading central banks could raise interest rates to help check inflationary pressures. Indeed, rates have already risen in several emerging economies.

The rise in commodity prices is putting pressure on consumers’ disposable incomes as households face higher food and fuel bills. At the same time, wage settlements in the leading economies have tended to come in below inflation. Consumer sentiment is being further eroded by falling house prices in the US, UK and parts of continental Europe. There have also been growing concerns over the impact of the credit crunch. In the UK, mortgage rates have risen and banks have tightened their lending criteria. Companies with insufficient cash flows and stretched balance sheets are finding it harder to secure extra funding. The housebuilding sector is under severe strain.

Banks represent a large part of the major equity markets and have continued to perform poorly. Within the UK,  HBOS and RBS announced large rights issues to help bolster their balance sheets, and Barclays and Bradford & Bingley have also sought to strengthen their capital reserves.

Corporate bonds initially rallied in April but subsequently slipped back, partly due to the amount of new issues, but also because of the poorer economic and corporate environment. A large part of the investment grade market – bonds with high credit ratings – comprises bonds from banks and financial companies.

This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 June 2008.

We’ve sourced these index figures, in sterling terms, from Financial Express to 30 June 2008. 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 capitalisation. 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. One of the best and most accepted ways 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 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 can’t give you 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.