The new found optimism in equity markets that we reported seeing towards the end of the period of our last Six-monthly Investor Update prompted many market commentators to warn of a short-lived bear market rally. However, heeding these comments and adopting the old adage “Sell in May and go away, come back on St. Leger day” would have proved a very disappointing strategy. We certainly hope that those who suffered the worst of the bear market joined in with at least some of the 36% returns for UK equities and 29% for global equities that have been seen over the last six months.
Not that it has been plain sailing and without its ups and downs along the way. At T. Bailey we remained cautiously optimistic through the period, participating in the improving outlook but cognisant of the economic and financial risks still faced. Indeed, many thought that equity markets had run out of steam during May and into June, when they paused for breath. Yet they recovered at pace in July and continued their onward and upward march through August and September. The pace of the turnaround in equity markets has been startling but perhaps only, in a historic context, as startling as the sharp falls we saw 12 months ago.
Equities have not been the only asset class to rally strongly. Other risk assets have improved as fear has abated. With the reopening of credit markets and a realisation that global trade will continue, prompting the need for companies and economies to restock, commodities rebounded sharply. These have been further fuelled by the political will of China to continue to develop its infrastructure which it has backed with its own economic stimulus packages.
Corporate bonds are another area that have posted impressive returns during the period, particularly from the financial sector where government intervention has brought about some stability and thwarted the bleakest of outcomes.
As the global economic landscape has improved the defensive assets of 2008 have looked less attractive. Cash has appealed to investors less as the need for risk free assets has abated and they are faced with low levels of returns from this asset class in the current low interest rate environment. Similarly government debt too has looked less attractive in recent months, as a result of the increased sovereignty risk resulting from the immense stimulus packages introduced by the Western, debt burdened economies.
Submitted by: Elliot Farley, Assistant Fund Manager
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