Our Investment Commentary for Q2 2013 (1 April to 30 June 2013)

The last three months can broadly be divided into two parts, a strong market rally in April and May, followed by a sharp sell-off in June. Despite high levels of volatility, markets enjoyed a strong start to the second quarter.

The FTSE-100 index climbed to 6,840 towards the end of May representing its highest level for five years.

Cause for Optimism

This rally was largely driven by economic stimulus programmes undertaken by central banks around the world in order to boost growth. As central banks have injected money into financial markets, known as ‘Quantitative Easing’ (‘QE’), the return on government bonds has fallen to unprecedented levels. This has resulted in institutions having large amounts of cash to invest and turning in many cases to equities so as to target higher returns. Another boost for markets came from better than expected figures from the US where consumer confidence and unemployment figures have started to show encouraging signs of improvement.

Market Volatility and Sell-Off

However, markets were quickly brought back down to Earth in June as prices tumbled 10% over a period of just five weeks, further demonstrating the volatility that continues to characterise the investment climate. The sell-off in markets was based on fears of a credit crunch and slowing growth in China, as well as talk of a reduction in the QE by the US Federal Reserve sooner than expected.

Turbulence continued to affect many emerging markets with news of riots taking place in Brazil and Turkey bringing political instability. Alongside this, the Indian Rupee recently sank to an all-time low against the US dollar.

At the end of June, the Federal Reserve Board Chairman, Ben Bernanke, announced that the Fed may taper its quantitative easing bond-buying strategy by next year. You could be excused for thinking this was a positive sign of economic recovery, however, the news represented a level of uncertainty which did not sit well with the markets. It remains to be seen how the Bank of England will react once Mark Carney picks up the reins in July.

There was also cause for concern in China as fears of a credit crunch emerged following a tougher economic approach from the new premier, as well as the lowest period of growth in China for almost 30 years. China represents the world’s second largest economy and as a result, any dips are felt in markets worldwide.

Europe also remained in the spotlight as weak growth data and largely poor employment figures continued to cast a shadow over the Eurozone. Alongside these factors, June traditionally represents a bearish month as fund managers are less active resulting in generally lower trading volumes.

Markets

The table below shows the performance of key global markets in local currency terms, US dollars, and UK sterling terms, including dividends re-invested between 1st April and 30th June:

Market

Index

% change (local   currency)

% change (USD)

% change (GBP)

UK

FTSE-100

-2.0%

-2.1%

-2.0%

Europe

FTSE Europe ex-UK

0.0%

+0.3%

+0.8%

US

S&P 500

+3.2%

+3.2%

+3.7%

Japan

Nikkei 225

+12.7%

+5.8%

+6.3%

Hong Kong Hang Seng

-6.7%

-6.6%

-6.5%

World

FTSE World

+2.2%

+0.7%

+1.1%

UK Gilts

FTSE All Stocks

-3.8%

-3.9%

-3.8%

In local currency terms, Japan has once again outperformed other indexes, the US showed a small gain whilst the UK showed a small loss of 2%. Hong Kong demonstrated the largest losses with Europe showing no change. However, it must be remembered that currency has played a significant role over Q2 as in Q1 which makes the gains in Japan seem a little less impressive.

[Matthew Clark, Seabrook Clark Ltd, 3 July 2013]

Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.

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