Market View - November 2009

"Never in the field of financial endeavor has so much money been owed by so few to so many. And, one might add, so far with little real reform."

This Churchillian metaphor quote was taken from the Governor of the Bank of England, Mervyn King's address to Scottish business leaders at an Edinburgh dinner on October 20th, at which he called upon the banking industry to be split into lower risk deposit and higher risk investment banking operations which, he believes would limit the chances of the recent credit crunch banking debacle recurring, as well lessening the regulatory requirements otherwise necessary. His comments came as sources confirmed that the UK's debt in 2009-10 is set to soar to £27.2 billion or £61m per day following the government having to bail out the banking fraternity with public money (source: The Times)!

Bull markets supposedly climb walls of worry, and for the global equity rally that began in March to have any chance of continuing, it will need to continue doing that! US unemployment has almost reached 10%, and those out of work in the UK now number almost two and a half million (source:, while "The Times" highlighted the plight of the UK's beleaguered retail sector with a survey showing that one in ten High Street shops have shut during the first nine months of 2009, and sadly as they conclude many of these (bookshops, florists, corner shops, etc) that are at the heart of our communities will probably never reopen!

The relentless increase in the price of crude oil continued to worry market commentators as it went through $80 a barrel at one point during October. OPEC seemed surprised at the recent surge in the cost of oil in light of there supposedly being something like 125 million barrels of "floating storage" and little demand-side pressure from the fragile economic recovery? Some sources suggested that speculators are buying oil futures instead of or in addition to gold as a hedge against future dollar weakness.

However subsequent data revealed what many had suspected as a more likely reason for the price rises, namely that China's phenomenal growth in recent months had also seen its demand for oil increase at its fastest rate in three years when it grew by 12.5% in September, its sixth consecutive month of rising demand with consumption now at almost 8.2 million barrels per day, second only to the US (19 million bpd) (source: The Times). Adding to the gloom was a worrying report from Price Waterhouse Coopers titled "Dealing with (even more) debt, Big decisions, tough choices", which suggests that over the next five years, an additional £26 Billion per annum needs to be generated through a combination of additional taxation and or spending cuts over and above those already proposed in this year's budget, and warns that unless the party in government after the election takes the necessary action, the consequences will be consistently high interest rates, a volatile currency and uncertain business conditions (source: PWC).

Despite all the gloomy news and October's notorious history as being one of the most volatile months for stocks, the global equity market carried on climbing during the first few weeks of the month, with the S&P 500 index in the US appropriately enough pushing through 1100 for the first time in over a year on the 22nd anniversary of 1987's Black Monday. It could be argued that with around $3.5 trillion sitting in money market accounts in the US earning very low levels of interest, (the total value of the S&P 500 is only just over $9 trillion according to Bloomberg), there is a very strong possibility that if some of this money finds its way into the equity market, the current rally should go higher.

Anatole Kaletsky the Times Senior Economist speaking at a seminar that Ash-Ridge attended during October suggested that interest rates in the G7 countries should stay at 2% or less until the middle of the next decade. He also made a persuasive argument for increasing allocation within investment portfolios towards Emerging Asian markets as he feels they offer better growth potential with arguably less risk compared to developed world markets over the next decade.

Anatole explained how the strategy of buying and holding Asia ex Japan would have worked exceptionally well over the last ten years giving a positive return of 110% compared to zero growth for those invested in the MSCI World index (which even today has less than 5% representation from Emerging Asia stocks)! Anatole expects the outcome over the next ten years to be even more biased towards the emerging Asian markets, as countries like China and India switch from being predominantly exporting economies to major consumers which will ultimately benefit developed markets and enable countries like the US and UK to increasingly export to them.

An article which appeared during October in the Economist titled "Bull in a china shop" offered reassurance for any investors concerned about Chinese market valuations getting overheated, suggesting that the equity market's current Price Earnings ratio of 24 looks very reasonable compared to the figure of 70 during the stock market bubble of two years ago. The market's optimism for Emerging Asia's potential certainly seemed justified when China announced its third quarter GDP numbers, showing that the world's third largest economy had grown by a staggering 8.9% compared to the same period last year.

However while the outlook for some Asian markets like China and India does look very attractive, we need to be mindful that the economies of the US, Europe and the UK (where confirmation by the Office for National Statistics of a 0.4% contraction in the third quarter means the UK economy has now shrunk 5.9% since the first quarter of 2008) are in nothing like such rude health, despite their stock markets having risen more than 50% since the equity rally began in March of this year. As a timely reminder of the fragility of the economic recovery, and despite official news that the US was now out of recession following GDP growth of 3.5% during the third quarter, global markets faded badly during the last week of the month which marked the 80th anniversary of Black Monday in 1929.

Doubts concerning the sustainability of the economic recovery combined with uncertainty about the next actions of central banks resulted in the S&P 500 in the US falling more than 4% during the last week of October, and finishing the month at 1036 (6% below its 52 week high of 1101 set ten days earlier), down almost 2% over the month. In the UK, the FTSE 100 fell 3.8% during the final week, closing the month at 5045 (having been at 5300 just over a week earlier), down 1.74% over the month! (source:

With equity markets posting their first monthly losses since the rally began almost eight months ago, it has become clear that the easy gains have been made, and from here on investors should proceed with care!