December 2008
Volatility remained a feature of the markets during November, as illustrated by the fact that in
a month where the FTSE All-Share declined by 1.7% the FTSE 100 experienced its largest ever
one day gain.
A number of companies across a broad range of sectors have said that trading suffered marked and
very rapid deterioration during November. It has been clear for some time that a recession was
likely in the UK but the pace of the decline has caught both the markets and management teams
by surprise. Valuations have become of secondary consideration to the question of survivability.
Unemployment is rising and looks set to deteriorate further. Well known names have begun
to disappear from the High Street. The Royal Bank of Scotland has announced the results of
its second rights issue and the British government has found itself having to stand by almost
the entirety of its underwriting commitment. Even non-financial industries across the globe are
lining up to demand Government intervention during these difficult times.
However, there are some positives. The Monetary Policy Committee has now reduced interest
rates by 2.5% since the start of November, LIBOR has eased from its peaks and although there
are minimal signs that Banks have increased their appetite for corporate lending, the easing in
LIBOR and Government pressure for them to resume lending can only be of benefit.
It is remarkable how quickly attention has shifted from the threat posed by inflation to that of
deflation. CPI fell dramatically during November and with commodity prices under continuing
pressure this trend looks set to continue. However it needs to be remembered that the very
significant reductions in interest rates combined with the vast levels of Government spending is
causing sterling to depreciate, this in turn could provide an inflationary stimulus.
The British Chancellor has announced a package of fiscal stimulus. It remains to be seen how
effective this will be and what the ultimate cost will be but it demonstrates the government’s
recognition of the problems the economy faces. Clearly there is a risk that politicians will chase
votes at the expense of future financial security. Attempts to prop up the housing market or to
encourage the consumer to continue to spend at a level that has been shown to be unsustainable
are obvious examples.
It is very likely that the economic news flow will continue to deteriorate. It is also possible that
there will be further events that negatively impact markets. However expectations for corporate
profitability for the next two years are beginning to reflect the economic outlook with analysts
now forecasting declining earnings for a range of sectors. Many equities appear cheap by most
metrics. We will continue to invest in good quality companies with sound balance sheets and
transparent earnings and cash flows.
During the month we exited our position in Lloyds TSB on concerns over the proposed take over of
HBOS. The proceeds were re invested into the Barclays.