Following the marked improvement in fortunes in global stock markets during April, May saw investors sell out of bonds and move into equities as inflation continued to move upwards, particularly in the UK and Europe, dashing hopes of moves to lower interest rates in the short term by Central Banks.
The FTSE All Share Index improved marginally by 0.6% as the Consumer Price Index (CPI) rose to 3% year on year in April from 2.5% in March. If we see additional rises, this will necessitate the Governor of the Bank of England writing a letter of explanation to the Chancellor, which would be only the second time such action has been required, previously in April 2007 where inflation hit 3.1%. In the letter, the Chancellor must explain the intended measures to control consumer prices and how these will fall back towards the Government’s 2% target. Realistically, the figures therefore suggest that there may be a pause in monetary easing until the inflationary threat has passed. A key factor may be whether increased inflationary expectations lead to greater wage demands - at the moment average earnings growth is stable, although this will be something the MPC will be watching closely through 2008.
Elsewhere in global stock markets, performance was mixed. Japanese equities led the way and continue to benefit from an improvement in overall sentiment on high volume trading. The NIKKEI 225 Index closed 3.5% higher whilst the broader Topix index closed 3.6% higher.
US stock markets were mixed. The Dow Jones fell in US dollar terms as fears for the outlook for industrials increased. On a brighter note the technology biased Nasdaq rose strongly due to reported earnings being ahead of estimates and financials fell back due to reported losses and earnings down grades. Increasing oil prices dominated the news having doubled in price over the 12 months to the end of May, which was beneficial to oil producers, but vehicle manufacturers, chemical producers and airlines cut capacity, raised prices and announced lay-offs because of rising costs, which helped push producer price inflation to its highest level since December 1991.
In Europe, markets were generally flat with most indices higher by the middle of May, when the increase in oil prices and weakening profits outlooks weighed on sentiment. Having improved strongly in April, a number of stock markets in Asia decreased due to profit taking although there were also several that did produce positive returns notably Australia where resource stocks again led the way. Global emerging markets were higher despite rising inflation concerns with Latin America the best performing region due to a further surge in Brazilian stocks. Emerging Europe also improved, particularly Russia, whilst the Asian emerging markets fell due to under performance in China, Hong Kong and India.
Whilst the immediate outlook appears to be somewhat gloomy, we do still feel that real assets such as equities, fixed interest and property can provide real inflation adjusted returns over the medium to longer term, although still feel that in the shorter term, volatility will continue to be prevalent and that increased allocations to cash within Portfolios is a sensible strategy.
Summer 2008
Please note that this commentary is for information purposes only, we recommend that you obtain financial advice before embarking on any course of action.
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