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04 Ashcourt Rowan’s Head of Equities Research, Stephen Walker, discusses what has been, what is and what could be on the investment horizon Investment OutlOOk Although 2010 has, so far, been a year of uncertain direction, overall it is one in which investors should, on balance, have made a little money. In terms of the uncertainties apparent at the start of the year, it would be fair to say that many of these remain unresolved. One key issue for UK investors was the outcome of the General Election earlier this year and we believe a very different investment climate might have prevailed had Labour been re-elected. A Labour victory, along with its commitment to keep spending money the government doesn’t have, would likely have seen a significant rise in the cost of borrowing, a threat to the UK’s credit rating and would have had a (negative) knock-on effect on the cost of borrowing for companies and individuals. A Coalition is in many ways preferable to either a minority Conservative government or one with a small majority as it better enables the passage of what will, in some cases, be unpopular measures. It is very tough to argue against the need to rebalance the UK economy away from the public sector in favour of the private sector. This inevitably requires tough decisions within Whitehall – from our perspective a moderate degree of pain today looks a more palatable option than the sort of drastic austerity measures that Greece has been forced into. There are those who argue that this will kill off the economy’s nascent recovery before it fully gets going. This is possible if the contraction of the public sector is not matched by an expanding private sector but on balance we feel that this is a risk that needs to be taken. The parlous state of the nation’s finances has created a climate in which many companies do not wish to make investment and hiring decisions, and an improvement in the nation’s finances or even confidence that it will happen in the future may well be enough to unlock some growth in the private sector. While the ‘age of austerity’ has certainly received some unfavourable press, investors have offered a more ringing endorsement with UK Government Gilt-edged securities being among the best performing of all bond markets globally; in particular following the General Election. In addition, the UK stock market, which fell sharply in the weeks leading up to the election has, notwithstanding a few wobbles along the way, regained some poise and at the time of writing is back above where it started the year. There remains an avalanche of economic data that is published from one day to the next around the world and much of it remains contradictory. The start of the year was marked by optimism about a global economic rebound but this faded during the second quarter amidst some less positive data and the troubles within the Eurozone that of course had Greece at its forefront. For much of the summer there have been few positive signs (though this may be down to general seasonal factors) and it is only in recent days that there has been better news that has helped to improve investor sentiment. Investors are often preoccupied with all this backward-looking economic data and the proximity of the actual figures to all the forecasts circulated by City economists. We can find more useful signals within company earnings announcements. In general, company profits and to a lesser extent sales, have been ahead of most expectations and quite a lot of companies have subsequently raised their guidance for their full-year results. These results are obviously backward looking like the economic data but valuable information can be gleaned from trends in order books that are often disclosed with results. For example, one company might report an increase in demand for nuts and bolts that are used in making cars which, a few months down the line, might lead to increased demand for tyres and glass. Eventually that car will make it to the forecourt and a consumer will spend money buying it which will then feed into the published auto sales figures. For an investor, there is little point in waiting for the car to be sold; instead they need to anticipate the process of all this feeding through the system and understand how different companies and industries are positioned at different stages of the cycle.
05 THE GREAT HOPE FOR MAny InvESTORS IS THAT CHInA COnTInUES TO DRIvE ASIA AnD THE REST OF THE WORLD FORWARD. Overall, though company managements remain ‘cautiously optimistic’ to quote one of their favourite phrases, the sense that we get from the various company announcements is that things are gradually getting back to something approaching ‘normality’. There remain a number of issues that could cause the market to take a more negative tone in the coming months but we continue to try and mitigate this by spreading our investments widely. Something on the other side of the Atlantic that could certainly have a knock-on effect on our investments, both within the US and elsewhere, is the Congressional elections in november. Most Americans are failing to ‘feel’ the economic recovery and thus reflect this with disapproval of the President and the majority party in Congress, currently the Democrats. In such circumstances it would be reasonable to expect a mid-term move away from the Democrats towards the Republicans. In tandem with this, the so-called Tea Party movement (inspired by the original Boston Tea Party activists) are spearheading the campaigns for certain candidates in various states. The candidates backed by the movement vocally advocate smaller government, a balanced budget, a simple tax system and lower taxes amongst others and this agenda seems to appeal to much of ‘Middle America’ who have always been sceptical of big Federal Government. It is possible that the Tea Party sponsored candidates could help engineer something of a shift in Congress following the election if they manage to successfully tap into a groundswell of aggrieved public opinion. This could leave President Obama as something of a ‘lame duck’ during the final two years of his term and probably increases the likelihood of a Republican being the next to inhabit the White House. To the extent that this causes some legislative ‘paralysis’ in Washington this may be no bad thing. Historically, the US stock market has performed better when Congress is on one of its holiday breaks; the natural conclusion being that politicians on balance do more harm than good! Perhaps the Chinese have the right idea - the national People’s Congress only convenes once a year. The great hope for many investors is that China continues to drive Asia and the rest of the world forward and this seems likely to be the case. The Chinese government arguably navigated the credit crisis somewhat skilfully and whilst China is now the second largest economy in the world, on a per head basis its people remain poor. Because of this consensus view there is the danger that should anything go wrong in China, there could be a violent negative reaction in terms of asset prices. On a geopolitical basis, perhaps the greatest ‘wildcard’ danger is Iran where the situation can always erupt overnight though things appear relatively, dare we say it, quiet at the moment. So how do we navigate this world of uncertainty? The various investment strategies applied by Ashcourt Rowan are designed for an investment horizon several years into the future which helps us to screen out much of the dayto-day ‘noise’. In addition we invest in a wide variety of assets that should hopefully help to smooth out returns over time. It is within this framework that we try to add some value with relatively modest moves between one asset class and another, changing specific investments when superior opportunities arise.
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Page 7 and 8: 07 CHOICe & COntrOl Over yOur retIr
Page 9 and 10: a faIrer deal? Individual Savings A
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Page 13 and 14: 13 In An InDUSTRy OBSESSED WITH AvE
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