Investment Outlook - August 2012

A monthly round-up of global and local market trends

Investment review

Waiting on Europe

Equities rallied mildly in July as investors entertained hopes that policymakers might respond more effectively to mounting evidence of a slowing global economy. Bonds and gold also made gains on fears of a new eurozone crisis – a schizoid response that faithfully reflects the fragility and polarised nature of investor sentiment in current market conditions.

World

Global financial markets recovered somewhat from their midsummer doldrums on speculation that central banks might be able to help orchestrate an effective policy response to the deteriorating eurozone crisis. The European Central Bank, the Federal Reserve and the Bank of England buoyed equity markets temporarily with hints of further monetary stimulus and statements suggesting that they are willing to act to prevent a disorderly breakdown of the European single currency. The period of denial last year, when hopes that the developed world could simply grow its way out of the ongoing debt crisis, in many developed countries now appears to be over. Expectations of future growth have been lowered in the face of deteriorating economic data from Europe and the US, and clear evidence of a slowdown in China. The survival of the eurozone in its current form continues to hang in the balance, investor sentiment remains fragile and yields on 'safe haven' sovereign bonds remain at record low levels. Although many companies have beaten analyst earnings forecasts, earnings in aggregate have fallen and top line revenue is down even more sharply in the face of declining economic growth.

UK

As London prepared to host the Olympic Games, there was little to cheer about on the economic front. According to the Office for National Statistics, the economy plunged further into recession in the second quarter, with GDP contracting by a worse than expected 0.7%, following a 0.3% decline in the first quarter. Although seasonal factors, including poor weather, hurt high street sales and the extra Queen's Jubilee bank holiday in June also contributed to the weaker growth figure, economic recovery is likely to remain elusive until some core structural issues, including excessive debt, are addressed.

Despite the poor economic backdrop, equity markets proved resilient. One reason may be that investors had already pencilled in lower growth expectations. Another is that markets have started to anticipate a further easing of...