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Weight of evidence

Despite the decline in equity markets over the second quarter, we believe economic fundamentals and valuations within global markets remain very reasonable.

One or two companies which had envisaged floating in the early summer have delayed their introductions but we foresee no imminent let-up in the pace of merger and acquisition activity.

We also continue to see substantial stock repurchase programmes from major companies as being supportive to equity markets at or below current levels.

Naturally, the threat of unforeseen political shocks cannot be ruled out. However, having seen solid support for equity markets following the volatility in June, we continue to recommend an overweight position in equities and an underweight position in fixed-interest securities.

We retain a strong bias towards property companies, particularly in the UK. This year’s Budget paved the way for the introduction of real estate investment trusts, a more tax-efficient structure under which UK property companies may operate, and it has been noticeable that investment funds from abroad continue to target high-profile property assets, particularly in London and the South-east.

No further rises in oil prices are envisaged for the rest of this year and there has been a downturn in the prices of a number of other commodities such as copper and gold. In China, the authorities have been putting measures in place to dampen some elements of growth in the domestic economy. This has had knock-on effects on pricing for commodities and, in the short term, stocks in the resources sector may come under some pressure.

Sharp falls in the second quarter have triggered market sentiment to believe that it may be some time before these commodities regain the peak prices seen during the spring.

Bond markets worldwide were subdued in the second quarter and we continue to see little value in fixed-interest markets. If yields on short- to medium-dated securities in the UK were to rise over 5 per cent, we would look to reassess our position. However, these levels may not be seen for some time as we continue to forecast an increased degree of issuance by the Treasury over the next 12 months, given increasing funding requirements for the Government’s public expenditure programme.

We have been disappointed by the progress made so far this year in Japan. However, the economic background to Japan continues to brighten and, with confidence returning to manufacturing, prices are beginning to rise consistently and the threat of deflation seems to have abated. Our view is that domestic investors will look to move out of cash deposits and fixed interest into equity-based assets, meaning that domestic securities should rise in the medium term. We continue to advocate adding to holdings in Japan and envisage some strengthening in the yen relative to sterling. This strategy should result in sound investment returns over the medium term.

The US has been more resilient than most equity markets in the last quarter despite sometimes conflicting signals on economic policy sent out by Federal Reserve chairman Ben Bernanke. We still have concerns over the overall indebtedness of US consumers and it appears the housing market is particularly soft in areas such as New York, Florida and California. We envisage only modest progress in the equity market over the next six to 12 months.

It is evident that French and German economic activity is starting to pick up. We expect some modest appreciation of the euro against sterling over the next six months and retain a preference for German equities for the rest of the year.

Peter Thomson is chief investment officer and chief executive officer at Taylor Young Investment Management


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