Market Musings

A difficult month

Chris Mealing
Director, MDM Associates Limited
Independent Financial Advisers based in Ripley, Surrey.

More turmoil, with the FTSE100 falling back to November's low by the end of the month and bad news coming out of the woodwork all over the place. Everything is being driven by politics - and this is about the most fickle of all market drivers, not to mention virtually never before being the prime driver within living memory. The banks were at the fore-front of it all and February's casualties - HSBC and Lloyds - accounted for over 10% of the FTSE's 300-odd point fall alone. On the plus side for holidaymakers, the pound recouped some of its recent losses, although that damaged European and - to an even greater extent - Japanese investments' returns for Sterling-based investors.

Many sought sanctuary in the perceived safe-haven of gilts - pushing prices higher, making them all the more precarious in due course.

As suggested last month, there was a significant difference between good and bad corporate bond funds, amounting to 7½% difference over just the one month alone between them - what this will translate into over the full year is anyone's guess!

And another thing…..

So what's all this about "swinging singles"?

The graph depicts what has, unfortunately, become a common phenomenon of late - namely swinging unit prices. This is where the single price quoted for units in a fund does not allow for the entry and exit costs - which are usually charged separately - so, as price spreads on the underlying investments have widened in thin trading markets, especially in corporate bonds, the price of units has swung quite violently against those either buying or selling units, depending on which is greater on a given day. As you can see, this has been around 6%-7% on an almost daily basis. For this reason any fund switching should only be undertaken with great care.

If you add the swinging price scenario to the marked variation in corporate bond fund per-formance (best = FTSE+15% [ie up a bit], worst = FTSE-1% year to date [ie down 14%) you can see that you almost need to take more care over the choice of fund than the asset class AND need to be very careful about making any switches.

So, what do the investment houses think?

On a 12 month view on the basis of +/-5% the consensus is neutral on just about all assets, with the exception of being negative on all property and positive on corporate bonds and US and Pacific ex-Japan equities. As ever, this masks significant variations, with some entirely positive on equities, although all are mixed on the other asset classes.

As stated last month, we are in for a bumpy year, but it is when the outlook appears darkest that the best investment opportunities are usually to be found. Provided you have a few years' investment horizon this will prob-ably be the year you should not miss out on making your ISA investment.

If it helps, smaller companies look set to bounce more than larger companies (when they do), and emerging markets have less debt to clear out before they can make progress; also, it would appear likely that upward pressures on commodities will resume even if the world economy does not perk up much, as emerging markets become more urbanised; leading sectors out of a recession include industrial transport and technology. A long shot but a tech fund could be interesting

The above is not intended to imply any advice.

(All data: source: Sharescope: to 28/2/09)