Market Musings from MDM February 2010

A frosty start to the year in odd places

Returns for January

But the sweet spot was in sugar

The May contract for sugar was up nearly 13%. Not that relevant to most investors but perhaps a sign of things to come

What else did we see in January?

With January giving up some of the recent gains and the safe havens of 2008 – gilts and foreign currencies - back at the fore, we are now seeing investors taking a reality check, to see if last year’s exuberance that the world was not going to end had not been overdone.

There do, however, appear to be one or two emerging themes which may be gaining momentum. One such example was men-tioned above – sugar. Sugar prices have been forced up substantially by a poor crop in India, following a poor monsoon season. The next crop is due in June, so prices will start to fall as this starts to feed through.

It’s not all a one way street, though, as the recent shortage of soybeans, brought about by a drought in Argentina, was countered by the Chinese authorities stockpiling against such a problem, so prices have, if anything, slipped back. Global agriculture indices were up by nearly 40% over the past year, though.

Looking forward from here

This seasonality will always persist but the world is getting fuller and hungrier and the land available for food production is limited; it takes seven kilos of grain to produce one kilo of meat – and more of the world’s population are beginning to be able to afford to eat meat, especially in China and emerging markets, generally. Food prices look set for steady, inexorable rises over the coming decade. This theme is just starting to seep into investment fund portfolios.

As stated over the past few months, there is a lot of indecision in equity and fixed interest markets and we expect to see the recent increase in volatility continue for a while yet.

Most recently there has been increasing concern over whether or not some of Europe’s weaker economies (Greece, Spain, Portugal) can afford their recent promises and whether or not anybody will be buying their government loan stocks (equivalent to our gilts in the UK) to pay for these promises, or at what price they will be bought.

Philip Gibbs – one of the model portfolios’ fund managers, and extremely well respected in the City – is very cautious about this particular issue.

Investment houses’ market views

On a 12 month +/-5% consensus view, apart from US smaller companies and Japanese equities, on which they are neutral - they are positive on all equities. They are positive on UK corporate bonds but negative on gilts and neutral on international bonds. They are also neutral on all property and currencies.

..although, as we said last month, just watch out if things go wrong.

Model Portfolios

Model portfolio returns ranged from just over +1% at the cautious end to a little over 4% down at the aggressive end for the month, and around 9% to 20%+ for the past seven months, since they were initiated, broadly correlated with their risk profiles, with the strongest returns (and larger recent slippages) coming from the aggressive end – but you must remember these were exceptional times.

The above is not intended to imply any advice.

MDM Associates Ltd, MDM House, High Street,
Ripley, Woking, Surrey, GU23 6AN.
(All data: source: Sharescope: to 31/1/10)