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Monthly commentary September 2010

By September 10, 2010No Comments

SUMMARY For a change there is good news as well as bad. The US is still in a pickle, the Irish are being punished for grasping the austerity nettle, and the French just don’t get it. But UK businesses appear confident, and the Japanese precedent might be more positive than you have been led to believe.

For a change, there is good news as well as bad news. First the news that isn’t as good as has been reported.

Last week a manufacturing survey in the US marginally improved and their stock market stormed ahead, similarly later in the week when the US unemployment numbers were announced. Yet the survey is at odds with a raft of other forward looking indicators which are either deteriorating or, at best, not improving. And the unemployment rate is now at 9.6%, compared to 9.7% a year ago, so despite extraordinary stimulus the net improvement is next to nothing.

US consumer confidence also rose more than expected, by 2.5 points to 53.5. But this needs to be put in perspective, as during a recession this index averages 70 – and isn’t this meant to be the recovery phase?

It isn’t just about the US. In Europe, Ireland is being punished for being the first to grasp the austerity nettle with deeper economic problems, and Greece has sunk further into recession alongside fears of resumed street protests. France was paralysed by strikes earlier in the week as the government threatened to raise the retirement age from 60 to (just) 62 (clearly the French just don’t get it!). The age of austerity is underpinned by demographic trends, as highlighted in the latest TopFunds Guide, and in an article in the Wall Street Journal it was stated “by 2050 60% of Italians will have no brothers, no sisters, no cousins, no aunts, no uncles”. So who’s going to be paying the (sky rocketing) taxes to support the state?

What continues to encourage us is how positive are many company managements. There is a mix of relief and optimism that, following a torrid couple of years, profits and cashflow have bounced sharply. Debt is being rapidly repaid, and merger and acquisition activity is increasingly being supported by banks.

For the last decade or so, Japanese companies have also found themselves accumulating cash. From the perspective of a Western observer, obsessed with property and stock markets, the falls of both asset classes by 70-80% since the peaks of 1989 is catastrophic. Yet during the 1990s their GDP did not fall – growth was tepid to say the least, but it wasn’t the post-nuclear Mad Max kind of world that Western commentators would have you believe.

This is one precedent which at least suggests that, while the outlook for the indebted Western economies will undoubtedly be painful, it doesn’t have to be catastrophic, because most people and businesses will adjust to unfolding events; some sooner, with remarkable stoicism (the Irish), and others later, with very bad grace in the meantime (the French).

Turning to markets, in the short term risks remain high in stock markets, and volatility is remarkable. In recent months, the change of emphasis by many clients, to less volatile and more defensive funds, has worked very well.

Dennehy Wealth