Friday, 27 July 2012

Week in Review: The torch burns on while the growth splutters out…

The Olympic torch came by Brewin Dolphin’s joint HQ in London. Having dashed from our morning investment meeting to catch it we didn’t get the best view but here it is for posterity:

The torch was obviously big news and I for one am very excited about the Olympics. There has, however, been other news too. The week got off to a particularly bad start as the German press broke several stories about the IMF’s patience which, apparently, is rapidly running out as far as Greece is concerned (here is Der Spiegel’s version – don’t worry it's in English).

The Hellenic Republic has continued to disappoint its creditor overlords in terms of ‘reforming’ its budget.  Now, with an August debt payment due soon, the IMF is supposedly close to deciding not to send good money after bad.  On first impressions this looks like bluster. After all, so much of the credit extended to Greece comes straight back as debt interest payments that it really does seem to be cutting off the nose to spite the face if creditors turn the taps off now. But if they are trying to bluff Greece into greater efforts then their strategy is a costly one. Every month Target2 net claims, a measure of the disparity of flows of currency between euro area member states, keeps growing. This reflects deposit flight from the periphery towards the core and any bravado about how easy it would be to cope with an exiting country will add fuel to that particular fire - the consequences of which I will speculate about next week.

The week, however was overall a good one for equities (although the UK was one of only a handful of equity markets that fell). As we have discussed before, a more accommodating attitude from the ECB and a willingness to put its balance sheet behind the crisis resolution fund are the key to turning Europe’s travails from a crisis into a mere slump (which would be better). Hints were dropped about such action on Thursday and Friday, despite drawing characteristic denials from the Germans, provided some weekend cheer to equity investors. Spanish equities rose over 4% over the week, closely followed by their Italian counterparts.

Back at home investors took the dismal UK GDP Performance in their stride - unsurprisingly when all is considered:  the FTSE100 generates 80% of its revenues from overseas and, of those generated at home, utilities and food retail are fairly robust in the face of an economic slowdown. The likely policy response however, is further quantitative easing which will likely be supportive for equity markets as it forces bond investors to seek out higher risk assets (this is what is known within the ivory tower of the Bank of England as the portfolio rebalancing channel). “Weak is the new strong” as far as equity investors and remains a consistent theme for the market.
Guy Foster
Head of Portfolio Strategy

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