Quarterly investment commentary – second quarter 2009

A good quarter for equities and corporate bonds

The second quarter witnessed a continuation of the rally in global equities from the lows seen in early March. Although towards the quarter-end there were signs that markets were consolidating their earlier gains. Some Asian and emerging markets were particularly strong. Commodity prices moved higher, with oil rising to just under $70 a barrel by the end of the quarter.

Overall, market sentiment was buoyed by some improved economic data. The progress made in sorting out western banking systems, better than feared corporate profits, attractive valuations and the high levels of cash available for investment also helped.

Many major banks and corporations announced more encouraging results. In the US banking system, the successful outcome of the recent stress tests was greeted positively. Elsewhere, manufacturers have been rebuilding their stock levels following the dramatic declines in raw materials and finished goods being held for sale of Q408 and Q109. There are now signs of a better balance between production, new orders and finished goods and materials held. UK manufacturing output rose in June for the first time since March 2008.

While the worst of the economic downturn may now be over, a ‘v-shaped’ recovery looks unlikely. Consumer spending accounts for a large part of GDP for the major western economies. However with rising unemployment, personal consumption remains under pressure, especially in the US where house prices are still falling and credit conditions continue to be tight.

Regionally, ‘Asia excluding Japan’ has fared better than more developed countries in the global economic downturn. Domestic-led growth is helping to offset the downturn in exports resulting from weak global demand for manufactured goods. While governments across the world have taken measures to support economic activity, China has been particularly active, having earlier announced a fiscal package totalling £374bn. This is a reflection of the country’s huge monetary and fiscal strength, which is being drawn on to boost economic activity through new rural development and infrastructure projects.

In contrast to the more positive tone in equity and corporate bond markets, government bond prices fell and yields moved higher over the quarter. Investors became concerned over the huge amount governments need to issue to fund the sharp rise in borrowing in western economies. Also, worries over the economic outlook began to ease and fears grew of a pick-up in future inflation.

This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 June 2009.

We’ve sourced these index figures, in sterling terms, from Financial Express to 30 June 2009. 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’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.

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