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Market commentary March 2010

By March 8, 2010No Comments

SUMMARY. The UK stock market has performed better than many others over the last month, including the likes of China and India. Can it last? Plus corporate bonds continue to make money, despite pronounced volatility elsewhere, and remain an excellent ISA choice with high tax-free income.

P.S. The latest TopFunds Guide is also available – ring or email if you have not yet had a copy. You should have received our ISA Guide by now – because of Easter, please don’t leave it until the last minute and ask for extra applications now if they are needed. Last but not least, the new Fidelity China fund has attracted great interest, read our review here.

Despite a number of well publicised negatives (particularly concerns over sovereign debt, which stretches far beyond Greece, the Chinese beginning to take the steam out of their economy, and concerns over a hung Parliament) the UK stock market has performed better than many others in Europe and around the globe (including the likes of China and India) over the last month.

So what is going on? Firstly volume has not been high, so even a relatively small amount of institutional cash has the ability to push the UK market somewhat higher. Secondly, while the fall in the value of the pound sterling has mostly generated negative headlines, the institutional buyers of the stock market understand that this is positive for most large companies – 70% of earnings from FTSE 100 companies are generated in foreign currencies, so when the pound falls it pushes their profits up.

Back in December we highlighted the possibility that if interest rates remained low, stock markets (not just the UK) could go much higher than most expected in 2010. But at the moment thisstrong UK stock market move is anomalous in a global context. So stay on your toes, particularly with the election ahead – as we said in the most recent edition of the TopFunds, this is not the time to relax.

What about corporate bonds? From New Year to the end of February the FTSE 100 index went down 0.4%, whereas Henderson New Star Sterling Bond was up over 4%, as was Old Mutual Corporate Bond, and with little volatility. In the long run of course we expect equities (particularly high yielders) to sharply outperform bonds (whether corporate or sovereign) but in the year of transition that lies ahead (as government stimulus is withdrawn, and countries learn how to cope with huge deficits), there will be pain for equities. Corporate bonds are not immune to this, but the last two months of limited volatility (and some upside) highlight that their reaction needn’t be extreme.

Asia and emerging markets have been very profitable since the lows of March 2009, but there has been stalling for a few months, led by the Chinese stock market (which peaked last August in local currency terms, and we were cautious from last September). The debate over China has hotted up lately with the launch of the new Fidelity fund managed by the legendary Anthony Bolton, and also because a healthy Chinese economy is vital for a global economic recovery. We continue to be optimistic taking a long view, but are still cautious in the short term – this is covered in our review of the Fidelity China launch.

Finally, please remember that the Easter break falls across the end of the tax year, so please don’t delay with ISA applications or pension contributions.

Dennehy Wealth