Shaw Capital Management Investment Equity Markets 2010 Part 1

Equity markets have rallied over the past month, sentiment has swung once again towards a more

optimistic view of the prospects for the global economy, and concerns about sovereign debt defaults in Europe have eased. Wall Street has recovered from the sharp sell-off in late-June, helped by some encouraging second quarter earnings reports; and markets in Europe have responded, with the UK market providing the best performance over the month. The worst performance amongst the major markets has occurred in the Japanese market because of disappointing economic news and increased political uncertainty after the setback for the government in the recent election. The general improvement in the markets over the month is a welcome development. The gloom in April and May about economic prospects was clearly overdone. The US economy is performing as expected, and the Chinese authorities are clearly intent on preventing their economy from overheating.

The global economic recovery will therefore proceed at a slow pace. The sovereign debt crisis in Europe remains unresolved and defaults remain a real possibility. The risks have therefore increased in the bond markets, and this has provided support for the equity markets. So long as monetary policy remains supportive, the global recovery should eventually produce a sustainable improvement in bond prices; but some of the current uncertainties in the bond markets must be resolved before this can occur.

The performance of the US economy remains the key factor is assessing the prospects for the equity markets. There has already been a request to Congress for additional spending programmes “to keep the economic recovery on track”, and although there has been no response so far, some action may become necessary. The excess gloom has disappeared, fears about sovereign debt defaults in Europe have eased, and there have been encouraging corporate results from a number of major companies, including Microsoft, Caterpillar, UPS, and Intel. Problems still remain in the banking sector, and have been reflected in the fall in earnings from investment banking at Goldman Sachs, Citigroup, Bank of America, and JPMorgan; but overall investors have been reassured that corporations are coping fairly

well with the present situation. Mainland European markets have also recovered from the sharp falls. There has been encouraging news about the economic background in the euro-zone; fears about

sovereign debt defaults have eased; and the latest “stress tests” have only revealed weaknesses in seven of the ninety-one banks that were included in the survey. Euro Markets have therefore been able to follow the upward trend on Wall Street, and regain recent losses, despite the uncertainties that have still to be resolved.

Conditions are clearly continuing to improve in many areas of the euro-zone economy, and especially in

Germany, helped by the big fall in the value of the euro in the first half of the year, and the strong growth in many of the export markets in the developing world. German companies have taken full advantage of the competitive currency and the available export opportunities, and so, even though domestic demand has remained relatively weak, the German economy is now expected to grow by around 2% this year. The situation is very different in Greece, Spain, Portugal, Ireland, and even in Italy, and these weaker economies are obviously acting as a drag on the overall performance of the area. The latest purchasing managers indices for both the manufacturing and services sectors of the area are higher, and argue against a pessimistic view of growth prospects; but for the moment we have left unchanged our modest forecasts of overall growth around 1.5% this year. The European Central Bank is clearly more optimistic about prospects. So far it has not raised its growth forecasts; but based presumably on the assumption that the recovery from recession is soundly based and self-sustaining, its reaction to the present situation contrasts sharply with the cautious view of the Fed.

The president, Jean Claude Trichet, is arguing that further public spending cuts and tax increases should be introduced immediately, especially in Europe, but also elsewhere in the industrialised world. “Without the swift and appropriate action of central banks” he recently argued, “and a very significant contribution from fiscal policies, we would have experienced a major recession. But now is the time to restore fiscal sustainability”.It is not clear what the consequences of this view might be; but the central bank might even be encouraged to tighten monetary policy as the present programme of fiscal retrenchment develops.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Investment Equity Markets 2010 Part 1

Equity markets have rallied over the past month, sentiment has swung once again towards a more

optimistic view of the prospects for the global economy, and concerns about sovereign debt defaults in Europe have eased. Wall Street has recovered from the sharp sell-off in late-June, helped by some encouraging second quarter earnings reports; and markets in Europe have responded, with the UK market providing the best performance over the month. The worst performance amongst the major markets has occurred in the Japanese market because of disappointing economic news and increased political uncertainty after the setback for the government in the recent election. The general improvement in the markets over the month is a welcome development. The gloom in April and May about economic prospects was clearly overdone. The US economy is performing as expected, and the Chinese authorities are clearly intent on preventing their economy from overheating.

The global economic recovery will therefore proceed at a slow pace. The sovereign debt crisis in Europe remains unresolved and defaults remain a real possibility. The risks have therefore increased in the bond markets, and this has provided support for the equity markets. So long as monetary policy remains supportive, the global recovery should eventually produce a sustainable improvement in bond prices; but some of the current uncertainties in the bond markets must be resolved before this can occur.

The performance of the US economy remains the key factor is assessing the prospects for the equity markets. There has already been a request to Congress for additional spending programmes “to keep the economic recovery on track”, and although there has been no response so far, some action may become necessary. The excess gloom has disappeared, fears about sovereign debt defaults in Europe have eased, and there have been encouraging corporate results from a number of major companies, including Microsoft, Caterpillar, UPS, and Intel. Problems still remain in the banking sector, and have been reflected in the fall in earnings from investment banking at Goldman Sachs, Citigroup, Bank of America, and JPMorgan; but overall investors have been reassured that corporations are coping fairly

well with the present situation. Mainland European markets have also recovered from the sharp falls. There has been encouraging news about the economic background in the euro-zone; fears about

sovereign debt defaults have eased; and the latest “stress tests” have only revealed weaknesses in seven of the ninety-one banks that were included in the survey. Euro Markets have therefore been able to follow the upward trend on Wall Street, and regain recent losses, despite the uncertainties that have still to be resolved.

Conditions are clearly continuing to improve in many areas of the euro-zone economy, and especially in

Germany, helped by the big fall in the value of the euro in the first half of the year, and the strong growth in many of the export markets in the developing world. German companies have taken full advantage of the competitive currency and the available export opportunities, and so, even though domestic demand has remained relatively weak, the German economy is now expected to grow by around 2% this year. The situation is very different in Greece, Spain, Portugal, Ireland, and even in Italy, and these weaker economies are obviously acting as a drag on the overall performance of the area. The latest purchasing managers indices for both the manufacturing and services sectors of the area are higher, and argue against a pessimistic view of growth prospects; but for the moment we have left unchanged our modest forecasts of overall growth around 1.5% this year. The European Central Bank is clearly more optimistic about prospects. So far it has not raised its growth forecasts; but based presumably on the assumption that the recovery from recession is soundly based and self-sustaining, its reaction to the present situation contrasts sharply with the cautious view of the Fed.

The president, Jean Claude Trichet, is arguing that further public spending cuts and tax increases should be introduced immediately, especially in Europe, but also elsewhere in the industrialised world. “Without the swift and appropriate action of central banks” he recently argued, “and a very significant contribution from fiscal policies, we would have experienced a major recession. But now is the time to restore fiscal sustainability”.It is not clear what the consequences of this view might be; but the central bank might even be encouraged to tighten monetary policy as the present programme of fiscal retrenchment develops.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Investment Equity Markets 2010 Part 2

For the moment attention is focused on the strength

of the German economy, and the beneficial effects that

will be felt elsewhere in the zone; and there has also

been a relaxation of tension about debt defaults, after

the rescue package agreed by the member countries,

and the intervention by the ECB to support the weaker

bond markets.

The German export performance depends of the

maintenance of strong growth in the global economy

that may not be sustained; and the odds still suggest

that one or more of the weaker countries will at least

be forced to defer interest payments on its sovereign

debt, and may even default. The latest improvement

in the markets therefore seems likely to need further

support from Wall Street if it is to be sustained.

The best performance amongst the major markets over

the past month had occurred in the UK market. The

measures announced by the new Coalition government

to reduce the size of the fiscal deficit have been well

received by the market, despite the fact that they will

slow down the pace of the economic recovery over the

coming months; and the latest estimate of a 1.1% growth

rate in the second quarter of the year suggests that the

effects of the fiscal retrenchment might even be less

than had been expected, and has removed most of the

fears about the possibility of a move into a “double-

dip” recession.

The improvement in sentiment amongst investors is

therefore easy to understand.

Even before the announcement of the estimate of

growth in the second quarter of the year, there had

been further evidence of an improving economic

situation.

The unemployment rate fell; retail sales volumes rose

by 1%, the strongest monthly increase in almost a year;

and the latest quarterly survey from the CBI reported

that manufacturing output increased at its strongest

rate since 1995.

The 1.1% estimated rate was well above most forecasts.

It was the result of expansion in both the manufacturing

and services sectors of the economy.

But the most surprising figure was the estimated 6.6%

rate of growth in the construction sector that accounted

for around one third of the overall growth in the period.

It has also produced considerable interest regarding

the reaction of the Bank of England to these figures.

The bank has previously been mainly concerned about

the risk of slower growth, and had even considered at

the last meeting of its Monetary Policy Committee

“arguments in favour of a modest easing in monetary

policy” because “prospects for gross domestic product

growth had probably deteriorated a little over the

month”.

The mood will have changed now; but the governor,

Mervyn King, has recently indicated that there will be

no early changes in policy as a result of one set of

figures.

The background factors affecting the market therefore

remain. Short-term interest rates will remain low, and

the economy is performing better than expected; but

the austerity measures that are to be introduced, and

especially the increase in VAT in January, will depress

demand over the coming months.

It therefore seems likely that the UK market, like the

markets in mainland Europe, will need further support

from Wall Street if the recent strength is to be sustained.

The Japanese market is lower over the past month.

There has been further evidence that the pace of the

recovery in the Japanese economy is weakening; and

the poor performance by the ruling Democratic Party

in the recent election seems likely to lead to a period

of political uncertainty that will make it difficult for

action to be taken to reverse the trend.

The earlier decision to introduce measures to reduce

the massive fiscal deficit was a major reason for the

government’s poor election performance in the

election, and may well be reversed; and the Bank of

Japan’s action to try to increase the rate of bank lending,

especially to smaller companies, also seems unlikely

to have much of an effect on the economic situation.

The background situation in Japan is therefore very

disappointing, and this is reflected in the performance

of the equity market. It seems unlikely that there will

be any early improvement in the situation, and so the

Japanese market weakness looks set to continue.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Investment Deadlock for Japan

The Democratic Party of Japan’s (DPJ) landslide victory

in the Lower House election a year ago ushered in

euphoric predictions of bold new policies, and even a

transformation of the Japanese political system.

There were widespread hopes that the DPJ would end

the run of short-lived leaders. Instead, Prime Minister

Yukio Hatoyama’s tenure proved to be a slow-motion

train wreck. Indeed, the DPJ quickly showed itself to

be no more competent in governing Japan than its

much-derided opponent, the Liberal Democratic Party

(LDP).

After shedding its two albatrosses of Hatoyama and

general secretary Ichiro Ozawa, and many of its earlier

campaign pledges, the DPJ hoped for a respectable

showing in the last Upper House election. Instead, the

ruling DPJ suffered a stunning defeat, when voters had

the opportunity to show whether they were confident

in Prime Minister Naoto Kan’s just over 1-month-old

administration.

The party ended with only 106 seats, far short of the

122 needed for an outright majority. The gap is too

large to be filled by creating a coalition, because the

most likely potential partners also lost seats.

As a result, the DPJ coalition can no longer ensure

approval of its legislative initiatives.

A twisted parliament portends even greater legislative

stalemate and political gridlock. Gerald Curtis, a

professor at Columbia University in New York and a

long-time expert on Japanese politics, said the election

had returned Japan to the paralysis and gridlock of the

past few years. “You cannot pass a budget now in this

political environment. You’ll have weak and unstable

government. While the world changes fast, the Japanese

government will change very slowly”.

Trying to put a good face on the results, Kan said he

viewed the election as a “starting point” for his push

for a more responsible government ...

The policy implications of the election outcome do not

suggest an aggressive approach to monetary, fiscal or

structural policy over the next few months.

Indeed, the attention of the large parties will most

likely be focused on internal matters, leaving less time

for focus on the economy.

Gridlock is bad for the economy and for investor

sentiment if policy drift continues for a prolonged

period.

According to Alan Feldman, managing director at

Morgan Stanley in Tokyo, there are so many pressing

problems in the Japanese economy that the costs of

gridlock could be very high.

In particular, pressure on the Bank of Japan for more

aggressive monetary policy will likely be minimal, at

least until political disarray ends.

Without strong political leadership little progress is

likely on budget priorities.

The same goes for tax decisions.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.