Market View - December 2010

When you put your card in a cash machine these days and it says "Insufficient Funds", you can never be sure if it means you or the bank!

So reported Anatole Kaletsky, Chief Economist of The Times in one of his recent weekly articles when commenting upon the Irish population's ability to make light of an otherwise serious problem. The country's chronic banking situation which, for the latter part of November preoccupied global markets before Eire capitulated and decided to ask for financial support from their Euro brethren. Risk off (as the market has come to term it) then became the prevailing sentiment as money poured out of equities and commodities into the relative safe haven of the Dollar and US Treasuries.

Anatole, whose article headline read "Ireland will trump Germany in bailout bluff" went on to once again pinpoint the blame for the duration and depth of the financial crisis upon the US authorities decision on September 15th 2008 to allow Lehman brothers to fail, causing runs on AIG, Merrill Lynch, Citibank etc. He goes on to make the analogy with the current Irish banking crisis whereby both Dublin and Frankfurt know full well that to allow any Irish bank to fail would result in a domino effect upon the other banks not just in Ireland but in Greece, Portugal, and Spain but which could eventually lead to assets being withdrawn from Italy and France and being deposited in Germany, Holland Switzerland, thereby, in all probability destroying the Euro. Of course, while as Kaletsky rightly observes, many people in the UK would welcome this development, it is most unlikely that the likes of Germany and France would, having invested so much into the Euro concept. Effectively, when it came to Ireland negotiating a bailout of their beleaguered banks, they should have been holding all the negotiating aces.

"Rescuing banks can be like filling a bath with the plug out" was the description chosen in a recent Buttonwood article (titled Plugging the Hole) in The Economist magazine! The article reminds us that central banks have learned this lesson again and again through history and Ireland may prove yet another case study and goes on to explore in detail the four options available to Ireland and concludes that even once a country has resorted to the last option namely agreeing to a bail-out through foreign loans, its problems aren't necessarily over as depositors (in Ireland's case 166 billion Euros of domestic resident money and 203 billion Euros from non-resident investors) contemplate whether their money is better served by moving to another bank in a different country?

The re-igniting of the European Sovereign debt crisis and the expectation hangover in response to QE2 when it finally arrived conspired to make November a disappointing month for both global bond and equity markets with the MSCI Global Equity index down 2.35% and the JP Morgan Global Bond index down 4.49% while the FTSE 100 in the UK fell 2.59%, the S&P 500 in the US dropped marginally 0.23%, and the MSCI Emerging Market index fell 2.7%. Overall year to date during 2010, all the indices mentioned remain positive with (allowing for income reinvested) the MSCI Global Equity index up 4.61%,  the JP Morgan Global Bond index up 4.87%, while the FTSE 100 is up 5.44%, the S&P 500 up 7.86%, and the MSCI Emerging Market has climbed 12.24%.

The omens, in the short term however, are positive from an historic perspective for equities as the "Santa rally" usually kicks in around about the 13th December and on average continues well into January! From a fundamental viewpoint too, the attractions of selective equity markets remain in place which should hopefully prove reassuring as the City gradually winds down and focuses increasingly upon the seasonal festivities!

From all of us at Ash-Ridge Asset Management we'd like to take this opportunity to wish you and your loved ones a very Merry Christmas!