Monday, June 18th, 2012

Global Equity Models Commentary 18/06/2012

(This commentary was written originally specifically for the Sterling Global Equity Model)

Market conditions

The Bank of England and the UK Treasury announced a significant programme of loan support for small and medium-sized companies, which aims to fix the problem of a broken banking sector not transmitting QE into the real economy. We think it is an imaginative scheme, which deserves to succeed. However the gilt market, which had been hoping for another round of “conventional QE” sold off slightly on the news.

Current portfolio

After weeks of constantly rising exposure to gilts, it is pleasant to record a slight reduction in their recommended weight this week. A fall of six percentage points is not huge, but it is just enough to be worth highlighting, partly as an antidote to our comments last week about the possibility of zero exposure to equities. These are fragile foundations from which to build a rally and they could be washed away in a week, but even a bit of optimism is welcome after the gloom of recent weeks. The main beneficiaries were the UK, (thanks to the rally in the financials) and the US, which is still our preferred equity market. UK gilts still account for three quarters of the portfolio.

Outlook

The optimists may interpret all this as evidence that the storm is about to blow itself out. Pessimists will talk instead about the eye of the hurricane. The evidence suggests that excess volatility, the extra risk of investing inequities continues to fall, which is good news. Also worth highlighting are the four consecutive weeks of (small) positive returns from emerging markets in sterling terms – a welcome contrast with the eleven straight weeks of decline which preceded them.

 

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