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Hopes and Fears

To paraphrase the words of the late, lamented John Lennon; “And so this is Christmas, and what have we done? Another year over and a new one just begun. A very Merry Christmas and a Happy New Year. Let’s hope it’s a good one, without any fear.”

Fear is a state of mind that, for many, epitomises 2009. Fear, along with incomprehension, disbelief, anger and blame.

2009 dawned dark and foreboding. As we opened our new calendars, we were still hung-over, punch-drunk and reeling from the almost surreal events of the last quarter of 2008. The apparent near collapse of the banking system, the abrupt freezing of credit, the sudden dive in asset values, the alacritous slide of Sterling against both the Euro and US Dollar, the spectacular failure of several long-established institutions (such as Woolworths and MFI), the meltdown and near bankruptcy of Iceland‘s economy. Yes, the spectresof 2008, Fear and Uncertainty, still stalked the land.

When the London stock market opened on the 2nd January 2009 the FTSE100 index stood at 4434; down 35 per cent from its October 2007 level. However, it would fall another 20 per cent before long. The Bank of England base rate was at 2 per cent on the 1st January 2009, having been at 5.5 per cent just a year earlier. Interest rates too would have further to fall.

The UK economy officially entered recession on the 23 January 2009, although we all felt we had been there for several months already.

In February, Royal Bank of Scotland announced the largest loss in UK corporate history of £24bn. In the same month, to much public disgust and anger, it was revealed that the discredited Sir Fred Goodwin, the man who captained the RBS onto the rocks, would receive (at the tender age of 50) an inflation-proofed annual pension for life of £703,000. By June he was shamed into accepting a lower amount of £342,000 pa, although he had also pocketed a tax-free lump sum of £2.8M.

March saw the year’s low-point for the FTSE 100 (3512 on the 3rd March) and the Bank of England’s Monetary Policy Committee (MPC) reduced interest rates to a historical low of just 0.5 per cent on the 5th. The MPC also announced that it would commence quantitative easing measures (the printing of money in other form), Alistair Darling having earlier authorised up to £150bn of taxpayers money to be used to buy up assets (such as gilts and bonds) in an attempt to oil the wheels of UK plc, which at that time appeared to be in danger of grinding to a halt.

April’s budget heralded the introduction of a 50 per cent rate of income tax for those with incomes of more than £150,000 as well as a 60 per cent effective rate of tax on income between £100,000 and £112,950 (due to the phased loss of Personal Allowance for earnings in this band). Higher rate tax relief on pension contributions would be restricted for high earners and the scrappage scheme was also launched as a fillip for the UK’s ailing car industry.

As recently as December, the Labour government chose to put political expediency before economic imperative in it’s Pre-Budget Report, ducking the tough measures required to adequately increase revenue and cut spending, in favour of keeping it’s re-election hopes alive (albeit already probably mortally wounded).

For all the doom and gloom, 2009 was one of many investment opportunities for those with an appropriately strong disposition. Anyone investing in a basket of UK shares in early March, by mid-December was sitting on a 50 per cent profit. Even the average corporate bond fund provided total returns of around 15 per cent over this period, with the top-performing ones jumping up to 35 per cent. Amidst all of the uncertainty (indeed, because of it) gold posted another lustrous performance; its price rising from $US870 per troy ounce to an all-time high above $US1200 in early December (+38%). Other commodity prices have also sprung back hugely from early 2009 lows: the price of crude oil is up 60 per cent, while copper and sugar have doubled in value.

Looking ahead to 2010 and beyond, are there still opportunities for investors? Economic recovery is likely to be slow and laboured, particularly in the UK, saddled as we are with massive levels of debt (household, corporate and sovereign alike). While repeating the mantra that portfolios should be appropriately diversified across asset both classes and geographies, my view is that the UK commercial property and emerging markets sectors will be the big winners in 2010.

UK commercial property fund prices have dropped by as much as 40 per cent from their 2007 highs. While the recovery in asset values may not be either imminent or steep (and indeed may have further to fall), investors are meantime being rewarded with attractive income yields of 7 per cent or more.

As confidence and consumer demand returns in the US and elsewhere, emerging markets will be the ultimate net beneficiaries. China’s and India’s export markets will be revived, thus further fuelling the growth of their own domestic markets as they continue their transformation from peasant states to global superpowers.  Commodities too should continue to rise as demand recovers.

2010 promises to be a bumpy ride, but for those with an appetite for risk and a strong constitution, there will be profits to be made.

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