Quarterly investment commentary – second quarter 2011

We’ve written this commentary assuming you have some experience of investing in shares. This means that although we have tried to write as much as possible in plain language, we may have used certain words or phrases that might not be familiar to anyone new to investing. If there’s something you don’t understand, please contact your adviser. It is not an offer to buy or sell any investments or shares

Equity markets prove resilient

In general, the world equity markets proved resilient in the second quarter despite a slow down in the global economy, and heightened concerns over government debt in the eurozone periphery. April saw Portugal become the third member of the eurozone to seek a rescue package from the IMF and EU. In May, Greece’s problems returned to centre stage when the country was still at risk of defaulting on its debt.

The global economic recovery slowed. In the eurozone, economic performance sharply diverged between core countries and those on the periphery. German GDP expanded by 1.5% in Q1 on the back of a boom in exports, while French GDP rose by 0.9%. Elsewhere, the UK economy was flat over the six months to the end of March. Along with the impact of austerity measures, UK consumer spending has come under pressure from higher food and fuel prices. Retail spending slowed sharply in May after the feel good factor that surrounded the Royal Wedding in April. A number of well-known retailers entered administration while others registered a sharp fall in profits. However, the UK has many large, internationally-focused businesses that are insulated from the subdued domestic climate.

Among the major markets, Japan was the worst performer over the quarter. The Japanese economy moved back into recession at the end of Q1, following the destruction caused by the March earthquake and tsunami. However, the coming months should see a gradual rebound in manufacturing and consumer spending. Initial component supply problems are beginning to ease, although power shortages could continue over the summer following the difficulties at the Fukushima nuclear facility.

Elsewhere, US GDP data revealed the economy grew at an annualised rate of just 1.9% in Q1, against a figure of 3.1% the previous quarter. The housing market remains problematic, with a closely-watched index showing house prices fell to their lowest levels since 2002. However, the US corporate sector remains in good shape.

Inflationary pressures were another key concern. While higher interest rates are normally used to help curb inflation, central banks in the developed world are reluctant to risk derailing the economic recovery, and so far only the European Central Bank has raised rates from their record lows. Elsewhere, emerging markets are continuing to enjoy robust growth and to combat higher inflation, central banks have been raising interest rates to more normal levels.

It was a good quarter for government bonds as the slower pace of economic activity defused thoughts of any imminent rise in US or UK interest rates. The general erosion of risk appetite also meant government securities outperformed high yield corporate bonds..

This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 June 2011.

  1 yr   2 yrs     3 yrs    4 yrs      5 yrs 10 yrs
FTSE All Share
25.63% 52.19% 21.00% 5.24% 24.57% 59.15%
21.77% 53.39% 37.51% 21.25% 37.70% 16.71%
FTSE World Asia Pacific
16.99% 41.78% 30.17% 20.97% 33.80% 64.77%
FTSE World Europe ex. UK
29.56% 50.11% 19.93% 9.30% 37.55% 80.88%

We’ve sourced these index figures, in sterling terms, from Financial Express to 30 June 2011. The indices mentioned above are measures of the markets they represent. For example, the FTSE All-Share Index represents 98-99% of the UK market. It is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices.

You shouldn’t take past performance as a guide to future performance or as the main or sole reason for deciding to invest. It may have been achieved in a more favourable economic period that may not happen again, and tax conditions are unlikely to be the same. We don’t guarantee the value of your investment and any income you take from it, both of which can go down as well as up.

A long-term commitment

We believe it’s important, where possible, to take a long-term view when investing. Looking back over the years, volatility has always been a feature of world stock markets, with each setback followed by a recovery – some taking longer than others. The usual way to deal with volatility is to invest for the medium to long term – a period of at least five to ten years.

It’s important to find the right product and invest in the right funds, and this depends on your investment objectives and attitude to risk. If either has changed, your adviser will help you review your investment to make sure it continues to meet your needs. Although we don’t give investment advice, we do offer a wide range of funds suitable for almost all investment objectives and attitudes to risk.

We strongly recommend you speak to your adviser before making any changes to your plan.

July 2011


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Sterling ISA Managers Limited, authorised and regulated by the Financial Conduct Authority. Registered in England and Wales under company number 02395416. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.