Markets on life support certainly...

As I write markets, having retreating quite sharply from the highs reached at the end of 2009, have staged a partial recovered and still sit very comfortably above the lows reached in March last year. The UK FTSE 100 Index, at a present 5,305, has recovered by 46% in capital terms from its 2nd March 2009 low point. Sterling returns for most of the main international indices have also been compelling, with the Far East (ex Japan) and Emerging Markets leading the way. The one less compelling area has been Japan where the Topix index ‘only’ managed +23% over the same period. So, equity investors have generally seen worthwhile returns as the trend of macro news and corporate results has tended to support the anticipation of economic stability, if not recovery. However, cracks have started to appear with, for example, the announcement in November that Dubai World was asking for a standstill agreement on its outstanding debt. This caused significant ripples of anxiety within global markets, with analysts rushing to examine banking and other sector exposure to this previously fast growing emirate. Abu Dhabi took heat out of situation with the announcement of an assistance package and markets regained their forward momentum to close last year on a positive note. To our slight surprise, markets continued in good form early on in 2010 but there was until very recently some retrenchment, as China started to apply the brakes on its fast growing economy, whilst emerging concerns over the economic health of Greece and Spain also rattled investor nerves. All of this shows that the global economic recovery will certainly not be a smooth one and we recognise that we are now entering a crucial phase as the global economy comes off "life support". Monetary policy remains currently very accommodating, but at some stage in 2010/11, interest rates will start to rise within the key economies, whilst the various mechanisms such as Quantitative Easing, car scrappage schemes and banking sector support schemes will begin dropping away. This all represents real challenges, not just for equity investors but also for those with bond exposure. However, we remain broadly happy in that governments and central bankers will only moderate these support mechanisms very cautiously and will be aiming to minimise damage to the nascent recovery. In short, we suspect that investors will require a degree of nimbleness and imagination to see good returns over 2010, but opportunities continue to be available and we therefore remain cautiously positive.

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