Market Bulletin

MONDAY 19th OCTOBER 2010

Tel: 01437 766396
Email: mark.burch@sjpp.co.uk
Website: www.burchwealthmanagement.co.uk

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This weekly Briefing Note aims to pick out some of to avoid such an event. The prospect of another round of
the key financial and economic issues touched on in gilt purchases has driven government debt yields sharply
the press over recent days and from time to time lower over the last month, starting when the Fed gave an
includes the views of some of our independent fund initial signal of intent in September. The ten-year gilt
managers. yield has fallen to 2.94% from where it stood on the 20th
of September at 3.14%.
All eyes on the US
Macroeconomic events may have overshadowed the start
The Chairman of the Federal Reserve, Ben Bernanke,
of the third-quarter earnings season for much of the
had the attention of the world on Friday as he
week, but the results were generally greeted
delivered a bleak prognosis for the US economy,
firming up the likelihood of a further round of
favourably as equity markets globally are now at their
quantitative easing to battle economic slowdown and
highest since September 2008. Despite a late dip on
rising unemployment and head off the risk of a
Friday, the FTSE 100 gave a rise of 0.8% on the week,
downward spiral in prices. As reported in The
now at a level 9% higher than the start of September;
Times, speaking at a monetary policy conference in
while Wall Street stocks closed ahead for the week after
Boston, Mr Bernanke said that economic growth was
significant results from the technology sector.
less vigorous than the Fed preferred and that the risk
of deflation was higher than was desirable. “There Dollar under pressure
would appear, all else being equal, to be a case for
The prospect of further asset purchases in the US caused
further action,” he said. However, he also spelt out
heightened tension in foreign exchange markets, as the
the risks of additional stimulus, as by buying long-
week saw heavy dollar selling. In the moments after Ben
term debt from the Treasury the Fed would force
Bernanke’s speech, the dollar drifted another 0.7%
down long-term interest rates, which would make
against a basket of major currencies, reaching parity
mortgages cheaper and encourage consumers to
against the Australian dollar for the first time since it
borrow and spend. Further down the line, it is feared
was freely floated in 1983. The US currency sank to its
that this would give companies licence to increase
lowest levels of 2010 including a 15-year low against the
prices, leading to higher inflation. On the positive
yen, and a nine-month low against the euro.
side for the Fed, it would be hoped that the increased
revenue would encourage recruitment in the US, This dollar weakness saw a drive in global equity
easing the current 9.6% unemployment rate. markets and commodity prices, most of which are priced
in dollars. However, while the falling dollar may help
This, in turn, has increased speculation of the UK
struggling American exporters, The Sunday Times was
following suit by pumping billions of pounds in to
quick to point out that there could be unprecedented
the economy, with The Sunday Times suggesting
consequences around the world should the push in
that this could be as much as £100 billion as early as
commodity prices continue further, and posed the
next month. With the UK economy expected to slow
question: what does more damage, a weakening dollar or
over the winter, many fear a double-dip recession and
a stagnating America? With China the world’s biggest
economists suggest that the Bank of England will act
importer of raw materials such as iron ore and capped at £50,000 per year (from £255,000) from April
copper, a falling dollar makes these more expensive 2011. Of course, for the vast majority saving for
to import. This will push up the cost of everything retirement this still presents a very attractive objective
that China itself exports, passing on the price and opportunity. In addition to this, the lifetime
increases to customers around the world. allowance will be trimmed from £1.8 million to £1.5
million from 2012 onwards. The intention of this
Currency rows are rumbling all over the world. The
announcement is to reduce the cost of tax relief on
Financial Times reported that the US is to publish a
pensions, which HM Revenue & Customs estimates
paper stating that China is a “currency manipulator”,
amounted to £19.7 billion last year. According to The
and Brazil’s finance minister, Guido Mantega
Mail on Sunday, this will affect more than 100,000
claimed that his country is a victim of an
savers, but experts suggest this figure will increase over
international “currency war” that is artificially
time unless the allowances rise in line with earnings.
inflating the Brazilian real. If America is perceived to
However, The Independent on Sunday also pointed out
be deliberately driving down the value of the dollar,
that this will also affect people such as middle earners
this could add a new dimension to any row, but Ben
who are in a final salary pension scheme, or business
Bernanke’s prime concern is American workers, as
owners who planned to use their company assets to fund
employment is one of the key objectives written into
retirement. Anything over the £50,000 cap, including
the Fed chairman’s contract. In addition to these
employer’s contributions, will be subject to tax, which
disagreements, Japan accused China this week of
could trap those in final salary schemes for whom the
attempting to make the yen artificially strong by
taxable benefit of a pay rise could exceed the gross
buying Japanese government bonds. Japan’s reliance
salary increase. The message was clear though; these
on exports makes a stronger currency a disadvantage,
proposals could well affect pension savers as the plans
and government intervention has so far failed to stem
firm up, so this is an area that should be reviewed
the rise as the yen has strengthened more than any
regularly.
other currency (37.5%) against the US dollar since
the start of 2008. Patience could pay dividends
Rise and Shine Income investing was under the spotlight in The Daily
Telegraph, which pointed out that investors in this area
The surge in gold prices hit another high this week at
have suffered during the economic downturn. Recent
$1,387 per troy ounce as concerns mounted over the
times have seen many UK companies with little choice
global economic outlook. According to The
but to cut dividend payouts and retain the cash on their
Financial Times, this is causing mining companies
balance sheets, while the Bank of England has slashed
across Australia, South Africa and Latin America to
interest rates to 0.5% to keep the economy afloat. Bond
receive attention from buy-to-hold investors who
markets have been spooked by quantitative easing, while
subscribe to the view that metal prices will be driven
property values have fallen as well. In short, there have
higher for years to come. This view is generally due
been few options for income seekers; but, according to
to soaring demand from the emerging middle-classes
the paper, that could be about to change with equity
in China, India and Brazil. However, opinions vary
income funds being the beneficiary of dividends making
on whether the superior way to gain exposure to this
a comeback over the coming months. Research from the
asset class is through mining stocks or through direct
US shows that cash held on corporate balance sheets in
exposure to the yellow metal. The current rush to buy
developed countries is at the highest level for 60 years –
direct has been driven largely by investors seeking a
three times higher than it was in 1982, before the equity
hedge against inflation, or a currency play as foreign
market surge. The paper pointed out that so far in 2010,
exchange markets have become increasingly volatile.
210 FTSE companies have increased their dividend,
In spite of the gold price having quadrupled since while 55 have remained the same and only 30 have cut
starting the year 2000 at $280 per ounce, demand is the amount paid to shareholders. This compares with
expected to stay strong if central banks introduce figures of 156, 51 and 86 respectively for the same
further monetary stimulus programmes, weakening period last year.
the value of paper currencies and increasing the risk
The importance of dividends should not be
of inflation in Western economies. The rally in gold
underestimated. According to the 2010 Barclays Equity
has also helped push silver to a 30-year high of
Gilt Study, £100 invested in equities at the end of 1945
$24.90 per ounce, while base metals have also fared
would be worth just £241 today in real terms without the
well with copper prices looking increasingly rosy due
reinvestment of dividend income: but with reinvestment,
to shrinkage in supply.
that figure rises to £4,011. In the UK Equity Income
Pension cuts sector, fund managers tend to believe that the most
secure dividends are currently to be found in sectors that
The weekend press were united in their advice to did not rally with the general market last year. The likes
readers this weekend, advising pension savers to of the pharmaceutical, utility and telecom sectors are
review their pension arrangements after the amongst the cheapest markets, but could they offer good
government announcement that the maximum that value? Neil Woodford of Invesco Perpetual, manager of
can be paid into a pension and earn tax relief will be the St. James’s Place UK High Income funds, told The
Daily Telegraph, “I look to invest in companies that is not reflected in the valuation of its shares, then this not
can provide sustainable long-term dividend growth. only reduces the risk of losing money, but it also
If I can invest in a business when its growth potential increases the upside opportunity.”

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