Investment View (July 2013)

Overview

2013 is half done and most investors will be fairly pleased with the results so far, despite the recent weakness, most of which was concentrated in June. The trigger for this change in sentiment were the statements that accompanied both the May and June Federal Reserve interest rate decisions, where Ben Bernanke said that the Fed may begin "tapering" bond purchases, thereby starting the process of reversing the huge injection of liquidity that has been a feature since the financial crisis of 2008.

We view the ability to consider removing liquidity as being a positive development - the patient is slowly coming off life-support but the markets have viewed developments somewhat differently, despite assurances from the Fed that any tapering is conditional on a number of economic targets, especially a reduction in unemployment.

Within fixed interest, the sell-off in June was completely indiscriminate, with both the quality and higher yield (including EM debt) ends of the bond market moving downwards sharply, along with everything in between. Similarly, most equity markets were also down, taking the edge off returns for the year to date. Emerging markets didn't conform to this picture as they have been generally weak throughout the period caused by a lack of growth and the sluggish nature of the recovery in their primary export markets. On average, most EMs are down around 10% this year meaning that the valuation gap between EM and developed markets has increased considerably.

Just to round things up, on currencies, the Dollar has been strong against the Euro and sterling, whilst the Yen has been falling as a consequence of 'Abenomics'. Hedge funds have had a respectable six months, for a change, whilst commodities have generally been on a downward trend, especially gold which appears to have lost its lustre, for now at least.

When writing in April, we suggested that there would be a correction some time in Q2 or Q3. Consequently, recent events are not surprising and since we remain generally positive about the equity markets, in particular, the current period of weakness represents a suitable buying opportunity for the longer term investor. However, recent events serve as a potent reminder that the trajectory of many asset classes will continue to be driven by the policy decisions of Central Bankers from Brussels to Beijing more than by fundamentals.

United Kingdom

Although the FTSE 100 lost 5% in June, it is still up by close to 8% in 2013, with mid- and small-cap stocks being up 13% and 15% YTD...