Market View - April 2010

Following this year's UK budget, is it now the time to "move over Darling" as some tabloid headlines would have it?

The race for No. 10 has now begun in earnest following the Chancellor's budget pronouncements and saw an article the following day from Anatole Kaletsky, Chief Economist of The Times which ran "Darling finally gets the picture – even if it may turn out to be wrong". Anatole revealed that he is seriously concerned that none of the major parties seem to have grasped the key consideration for achieving Alastair Darling's forecast projected growth for the UK economy of 3% in 2011 followed by 3.25% in each of the following three years.

The three major political parties appear to be working on the premise of interest rates rising gradually starting later this year from the current 0.5% to around 6% by 2014. This in Kaletsky's view would guarantee the failure of the current anaemic recovery and as he comments in his article "Is it really prudent to believe that rising interest rates will be allowed to choke off a robust recovery precipitating a fiscal crisis?"

Anatole concludes "Or is it more realistic to assume that the Bank of England will be encouraged and if necessary instructed to keep interest rates near their present rock bottom level allowing the Treasury to balance its books? That will be the key to every budget in the next parliament, regardless of which party is in charge"

Meanwhile the sovereign debt crisis looks to have much further to run, but while as we suggested in last month's commentary that arguably the Emperor wearing the least clothes is Uncle Sam (who had almost $12 trillion outstanding at the end of 2009, of which $4 trillion has to be rolled over within the next two and a half years), the market for now continues to focus on the weaker economies of Europe. In the short term investors seem more than happy to continue buying US Treasuries whenever risk increases as evidenced by the greenback being up around 10% against other currencies on a trade weighted basis since the Greek financial crisis erupted.

Staying with the US and notwithstanding the additional burden on US finances of Obama's historic healthcare bill being approved by Congress at an expected cost of another $960 Billion to the federal budget over the next ten years, 13 States have filed lawsuits sighting the 10th Amendment "the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively or to the people". It will be fascinating to see the Supreme Court rule on these lawsuits as independent polls show the majority of Americans were against the healthcare bill.

Meanwhile the year long rally in global equities continued during March with the S&P 500 in the US rising almost 6%, (and now up around 75% since its 2009 low just over a year ago), while the FTSE 100 here in the UK rose more than 6%, and emerging markets continued to do well with the MSCI index for this sector rising almost 9% over the month. However the star performer was Japan where the Nikkei 225 rose almost 10% with some commentators suggesting the land of the rising sun may at last be ready to rise from the ashes after almost two decades of disappointing equity returns and economic stagnation.

Following March's strong showing the big question once more is where is global equity market headed next? While we would not be surprised to see the market pause in the short term, our outlook for equities this year remains positive, and therefore we would view any pullback in markets as likely to be temporary and an attractive buying opportunity longer term.