Market update – May 2012

The last three months have seen share prices hit by the continued uncertainty in the eurozone. Fears that Greece may leave the single currency and the knock-on effect this has had on other countries such as Spain, have reversed the steady gains that had been made since the New Year.

During April, Standard & Poor’s cut Spain’s credit rating to BBB+ and placed the country’s economy on “negative outlook”. Later during the month, the ratings agency downgraded its ratings on 16 Spanish banks, reflecting speculation the country’s banking sector has become too reliant on emergency funding. The cost of borrowing also rose in Italy, reflecting wider concerns over the country’s sovereign debt problems.

In the recent elections, a clear majority of Greeks voted for parties opposed to the budget cuts imposed by the European Union. However, a similarly clear majority are also in favour of staying in the euro, so the run up to the general election on 17th June should prove interesting.

Putting politics to one side, many European companies are actually thriving. Very few European companies are actually dependent on their local market, with the US and the emerging economies being their biggest buyers. US consumer spending is at its highest level for years, more than 5% higher than in 2007 prior to the credit crunch. The US economy expanded by 2.2% during the first three months of 2012, having increased by 3% the previous quarter. The slowdown was attributed to lower levels of investment in the manufacturing and wholesale sectors. The International Monetary Fund increased its forecast for economic growth in the US to 2.1% in 2012 and 2.4% in 2013, but also warned that many leading economies continue to face “major brakes on growth”.

The eurozone just managed to avoid tipping back into recession, registering zero growth during the first quarter of 2012 having previously contracted by 0.3% during the last quarter of 2011. The UK did officially fall back into recession, although this came as a surprise to many commentators on the back of positive business survey data. A recent report published by the Ernst & Young ITEM Club suggested UK businesses should loosen their purse strings in order to support the economic recovery. Risk-averse UK companies have been hoarding cash on their balance sheets, but Ernst & Young warned that this strategy is acting as a “major drag” on the economy, causing it to stagnate, and urged companies to start spending more on acquisitions, investment or dividends.

Economic growth in China slowed to reach an annualised rate of 8.1% during the first quarter of 2012. Looking ahead, the World Bank believes China’s economy will continue to decelerate through the year as a combination of slowing consumption, declining investment growth and weak external demand take effect. The World Bank trimmed its forecast for economic growth in China to 8.2% during 2012.

The long-awaited flotation of Facebook was disrupted by glitches on the Nasdaq stock exchange. The share price has since slumped amid concerns that the company was over-valued, and a group of investors is even suing the company, claiming that revised growth figures were not fully disclosed.

Other assets have performed well so far this year. Commercial property is still showing a steady gain, with the ABI UK Direct Property sector returning 1.4% year to date. Gilts and corporate bonds have also held up, continuing the trend seen for most of the last 18 months. This illustrates why diversification and “not having all your eggs in one basket” can be so important.

In summary, the recent market volatility is likely to continue in the short term, but for long-term investors this should not be a concern. Although the press delights in reporting the “doom and gloom” there is also plenty of positive news out there.

We are always available to discuss any queries or concerns, so just call or drop us an e-mail.

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