
June saw significant volatility during the month with slower growth anticipated for China acting as the main catalyst to drive resource equities much lower mid-month. The CBOE SPX Volatility Index or VIX ranged from 24% mid-month to 35% at the start of June and also by month end. Correlations between asset classes remain high by historic standards and implied volatilities continue to trade at a premium to actual.
One measure of economic activity, the Baltic Freight Index, is down 40% over the past month. Despite a huge injection of both fiscal and monetary stimulus, Europe looks moribund and US growth appears to be slowing. First quarter US GDP growth was revised down from 3.2% to 2.7%. In addition, two-year Treasury yields stand at a record low yield of 0.6%, which was not even seen during the depression and the 10-year yield has fallen below 3%. These low Treasury yields are clearly incompatible with most economists’ estimates of 3% annualised growth for the next few years. In Europe, the financial system remains under duress across Europe and according to the Bank of England’s June Financial Stability Report, banks in Europe and the US need to re-finance/roll-over $5 trillion in debt by » Read more: John Payne & Steven Miller – June 2010
Investors cannot stop worrying about debt. And this is the case no matter whether it is Southern European sovereign debt, Fannie and Freddie’s US mortgage obligations, or the upcoming aftermath of China’s lending binge last year. I can’t tell you for sure exactly how many, or which potential parts of this moving jigsaw puzzle are factored into expectations – and neither can anyone else. But there are a few interesting things to point out.
The electorates of Europe are just starting to realise the reality of the coming austerity measures. Conjecture about cuts amounting to billions of $, £ or € and tax increases are now becoming a reality. Significant reductions in policing and schools are happening, pay cuts to fund (reduced) pensions and tax rises that make a difference to everybody are now coming home to roost. The private sector is also starting to realise how big a client government is – and how generous it has been in the past in its behaviour as a customer. It seems almost inconceivable to us that this does not precipitate the much-feared double dip recession.
A cautious approach to the month proved correct but the rapid decline in equity markets resulted in there being almost no places to hide. Our more defensive positions and small/medium cap stocks were treated as harshly as the more overvalued cyclical ones. Equity markets continue to struggle with the issue of global growth where concerns about a deceleration in China now accompany the more obvious European issues and the potential for a spillover to the US. One or two slightly disappointing pieces of US economic data have frightened investors and in such an uncertain environment conditions in equity markets will remain highly volatile as authorities and central banks struggle to retain the correct fiscal and monetary policies. There is no doubt that the European governments and the ECB could have handled the situation significantly better and we sense that at least
Rupert Kimber – June 2010
July 14th, 2010 No comments »Our primary concern for several months has surrounded earnings forecasts, especially for next year when clearly the benefits of inventory restocking will be removed resulting in a lower base effect and therefore requiring strong sales to post a positive sales number. Analysts have remained very optimistic and have retained target prices that now look attractive given the recent market decline but this still appears overly ambitious as » Read more: Rupert Kimber – June 2010
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Posted in Monthly commentaries by Rupert Kimber