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GOODNEWS July 2013

Market View from the Professionals We have approached several firms for their outlook on the Markets. Ramsey Crookall, GHC Capital Marlets, Beaufort International, Accendo Markets and Killik & Co, have all kindly agreed to contribute. or + 44 1624 673171. Any views expressed in this article represent the author’s own opinions and may not represent the views of Ramsey Crookall & Co. Ltd. as a firm. Any opinions expressed cannot, by their nature, take into account individuals circumstances and therefore do not constitute investment advice. 6 The Illusion of Recovery With many of the World’s major stock markets trading close to all time highs, the dark days of the credit crisis seem but a distant memory. Since 2009 the S&P 500 Index has risen by over 100% and in May this year touched a record high. In Britain the FTSE 100 Index is up by over 10% year to date and is within 400 points of its 2000 record high. Yet at an economic level, this has been anything but a normal post-recession recovery. Were that the case, economic growth forecasts would be revised upwards and interest rates would be rising to stop domestic economies from overheating. There is no evidence of this in any of the major world economies, many of whom are either mired in recession or experiencing below trend growth. While austerity prevails, stock markets have powered ahead. It could be argued that through the use of ‘quantitative easing’ aimed primarily at suppressing bond yields, Central Banks have simply created another bubble in other asset prices, which are starting to look increasingly disconnected from fundamentals. And why would they want to suppress bond yields? Might it be because the growth seen over the last twenty years was accompanied by a credit bubble of such epic proportions that most Western Governments have debt to GDP ratios close to or in excess of 100%? The US Government has debts of over $16trillion. Governments are issuing more debt simply to service interest on their existing borrowings or to pay down maturing bonds. At some point bond yields will start to rise, as investors re-evaluate the risk associated with all this debt. Expect to hear the word ‘tapering’ a lot in the coming months but for now, while faith in the Central Banks prevails, lets en-joy the ride. Peter can be reached at probertson@ramseycrookall.com Peter Robertson, Senior Investment Manager To taper or not to taper, that is the question Ben Bernanke’s announcement in June that the Federal Reserve was preparing to “taper” its asset purchases sent financial markets into a tailspin. Government bond yields rose sharply as a result, whilst share prices in all the major markets fell. But what did Bernanke say to cause financial markets to react in such a negative fashion? As far as we can detect, all he said was that if the economy continued along the path envisaged b y the Fed’s central scenario, growth would be sufficiently “self-sustaining” that there wouldn’t be the need for the same amount of quantitative easing (QE) beyond the end of 2013. Ordinarily, such an upbeat assessment of economic prospects ought to have been unambiguously good news for equities, as the implication would be that economic conditions were return-ing to normal, with all the usual positive effects on corporate profits. But was the Fed getting ahead of itself? In GHC’s view the answer is an unequivocal “yes” as evidenced by the pronounced deceleration in bank lending to companies over the last couple of months and the re-sumed outright decline in mortgage lending, both of which have neg-ative implications for monetary growth and economic prospects. We therefore believe the Fed has to maintain its asset purchases for longer than financial markets currently expect, whilst policy interest rates will remain where they are at least until late 2015. In such an environment, and with valuations still undemanding (see chart), we are sticking with our long term overweight equity strategy, with emphasis on the US, the UK and emerging markets. Source: Lipper John Clarke, Chief Investment Officer 3.5 3.0 2.5 2.0 1.5 1.0 0.5 UK Dividend Yield Ratio 20 year gilt yield/Dividend yield 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Average since 1950 Yield ratio Equi ties expensive Equi ties cheap Black Monday 1960s ' fai r value range


GOODNEWS July 2013
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