Overview
With the global economy in such a fragile state, one would think that politicians would be working together to find solutions. In the US, it seems that the politicians have been more concerned about getting one over on each other than ensuring the world's largest economy avoids defaulting on its debt obligations.
We believe that with the current market volatility, now is the time for standing firm and not for selling out. Markets have got themselves in a fluster over a slowing US economy and a re-opening of the European debt saga. It is hard to see what has changed fundamentally over the last few days and while US growth has undoubtedly slowed, it has not reversed and some of the major US companies continue to post very healthy profits. Equally, the Euro issue has suddenly come to the fore again over a few slightly rash comments made by Jean Claude Trichet (The European Central bank President) coupled with the ECB starting to buy Irish and Portuguese bonds back in the secondary markets, which have spooked the bond traders.
We expect that there may be a few more days of nervousness and the equity markets may track a little lower (from a technical standpoint the next support level on the FTSE100 is at 5100), but unless anything “concrete” comes out to suggest that there is any substance to the worries (which we think is unlikely) then we would expect markets to recover. This may not happen as quickly as the fall (it rarely does) but in circumstances like this, there is a distinct danger of being out of the market and missing the recovery. It would actually probably be quite a good time to gradually add to equity positions for those with cash.
Developed equity markets certainly do not look expensive at these levels with most trading with forward Price Earning Ratio's (PE's) of 35+% discounts to the 35 year mean. They are not at the cheapest levels they have ever been, but they certainly look like pretty good value at these levels (provided the PE values are accurate).
A well diversified portfolio adopting a good spread of asset classes should of course have a much lower degree of correlation to equity markets which in turn should provide defensive qualities to portfolios and limit losses.
UK
The FTSE 100 ended the month at 5,815, from a starting point of 5,946. July saw the banks as being hardest hit, on the back of their financial exposure to sovereign debt across the eurozone. GDP growth for the second quarter of 2011 was 0.2%, a fall from the 0.5% increase over the first three months of the year.
House prices are 'stabilising' according to the latest report from Nationwide. The consensus among commentators is that there's a long way to go before the housing market can be referred to as anything more positive than 'stable'. Indeed, the Nationwide report states that completed sales are at half the level of activity seen prior to the credit crisis.
Europe
Preliminary estimates from Eurostat show that inflation has slowed across the eurozone to 2.5%. This may lessen speculation of an interest rate rise; the European Central Bank (ECB) has been maintaining interest rates at 1.5%.
We've previously highlighted Italy as 'one to watch'. Over the past few weeks, the Italian government has seen an increase in its borrowing costs, a direct consequence of investors sensing that lending to Italy carries increasingly greater risk.
US
As if the US didn't have enough to worry about managing it's debt problems, they have been vilified across the globe for letting politics get in the way of sorting out their domestic finances. The Chinese media was particularly critical of their inability to agree a financial plan in a timely manner.
The world's largest economy is still struggling to build any momentum. The US Commerce Department provided annualised growth figures of 1.3% at the end of the second quarter, below the forecast 1.8%. They have now also revised downward their forecast for the next twelve months.
Global
Rising prices, particularly fuel and food, continue to slow growth across the Asian economies. China remains the growth engine although manufacturing continues to slow and the Chinese property market looks over-inflated.
Better news from Japan, where the recovery from the economic impact of the Earthquake and Tsunami looks set to continue. Manufacturing output continues to improve and forecasts are positive.
Summary
The 'dual paced' global economy continues with western economies struggling whilst the emerging markets, including China, continue to deliver growth. There may be some slowing across Asia but overall the tiger economies remain resilient.
Outcomes are difficult to predict and western economies will remain challenged in finding a way out of the financial crisis. Let's just hope political differences can occasionally be put to one side for the sake of delivering a return to more certain times.
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