2010 Market Commentary
It hasn’t been a bad year all told for equities. Despite double digit stock market falls from mid-April to the end of June (the FTSE 100 Index fell over 16.5% from 15 April to 30 June1), it looks like being another very positive year for shares. The FTSE 100 Index is currently up 12.3% since the start of the year and the FTSE 250 Index (which tracks medium sized companies) is up 26.2% over the same period2.
In a year that has seen RPI (Retail Price Index) inflation reach 4.7%3 it is perhaps not surprising that gilts have had an unimpressive year as the fixed distribution becomes less attractive in an inflationary environment. The yield on 10 year gilts is currently only 3.63%4 and the FTSE British Government All Stocks (a gilt index) has managed only 4.90%5 during 2010.
If the 2008 financial crisis was a shock to the global banking system, the ripples are still being felt and fear returns with every bit of bad news to emerge. The Eurozone seems to be dying a slow death as politicians and financiers struggle to agree on the pace and content of measures to save it. Germany has done very well out of the Euro and continues to benefit, but its politicians and public seem reluctant to enact any measures that might save it. Political will should prevail in the near term, however, and it is far too early to talk sensibly about the demise of what remains the only alternative global reserve currency to the US dollar (not counting gold of course).
Looking forward it will be interesting to see if China will continue to tighten monetary policy. It is likely that they will but how aggressively is the key question. China announces its 5th12 year plan in the spring of 2011 and markets could react strongly to any surprises.
The theme of 2011 may well be one of currency war. In truth it has been a heated issue for some time now, but next year may be the year that currency hits the mainstream consciousness. Every country from the US, the Eurozone, Japanand emerging countries want their currencies to have a competitive exchange rate and are desperately trying to keep them valued as such. Nations who’ve seen their currencies aggressively appreciate are largely commodity exporters like Australia, Canada, Norway and Brazil. Interestingly, Sterling has strengthened since the Coalition Government took office as their debt reducing policies were well received by the market.
When trying to predict the future the safest line is that it remains ‘uncertain’!
1Financial Express, capital return (excluding dividend reinvestment)
2Financial Express, total return (including dividend reinvestment), FTSE250 Index excluding Investment Trusts
3Office for National Statistics
4Bloomberg.com
5Financial Express, total return (including coupon reinvestment)