Daily Themes
Increase your understanding with our in-depth examination of the major themes driving market behavior.
View the latest Daily Themes below.
July
Daily Themes - 30 July 2010
A cool down, but not a double dip
Daily Themes - 29 July 2010
The impact of the new normal on equities
Daily Themes - 27 July 2010
European Stress Tests – could do better
Daily Themes - 21 July 2010
European bank stress tests – our expectations for Friday’s results
Daily Themes - 13 July 2010
REIT yields look attractive, but dependant on economic recovery
Daily Themes - 9 July 2010
Weak growth, falling inflation and low policy rates – good for gilts
Daily Themes - 8 July 2010
Euro-zone: make or brake
Daily Themes - 7 July 2010
Fiscal austerity in Ireland – a working example
Daily Themes - 2 July 2010
A sterling and gilt-edged UK Budget
June
Daily Themes - 30 June 2010
Central banks will offset tight fiscal policy with loose monetary policy.
Daily Themes - 30 June 2010
Disappointing 2011 US growth will keep Fed ultra-loose.
Daily Themes - 28 June 2010
Small caps looking less attractive as they face higher risk.
Daily Themes - 25 June 2010
Earnings forecasts still too high, but valuations remain attractive
Daily Themes - 24 June 2010
Still positive on gold despite new record price
Daily Themes - 22 June 2010 - Budget Edition
UK emergency budget investment implications
Daily Themes - 22 June 2010
China’s currency move suggests optimism on growth and inflation
Daily Themes - 8 June 2010
Impact of EU debt restructuring on corporate profitability
Daily Themes - 4 June 2010
Attractive UK commercial property yields
Daily Themes - 2 June 2010
Is there value in equity markets?
May
Daily Themes - 28 May 2010
Europe’s fiscal tightening to have a negligible impact on global growth
Daily Themes - 26 May 2010
UK housing market will struggle to make headway
Daily Themes - 25 May 2010
Fiscal emergency to recession – counting the cost of the Greek crisis
Daily Themes - 10 May 2010
European policymakers get ahead of the curve
Daily Themes - 7 May 2010
UK post-election briefing
Daily Themes - 6 May 2010
Next steps in the euro-zone saga – will the ECB use the nuclear option?
April
28 April 2010 - Greece: Will the tail wag the dog?
Events over the past two weeks have increased the risk of a serious ‘tail event,’ whereby problems in Greece spill over to the rest of the euro-zone through the bond markets and via banking-sector linkages. Contagion in bond markets is already taking place. In an extreme scenario, substantial capital flight from euro-zone periphery banking systems to the euro-zone core is also possible.
22 April 2010 - The search for yields continues
The yield premium available from corporate bonds has dropped sharply as the credit crisis fades into history, but relative to government bonds they still look attractive. We see scope for further modest capital appreciation in 2010 as the search for yield continues and major government borrowers remain hampered by unwieldy debt burdens.
8 April 2010: UK spending cuts: impact on regions and cities
We have shown previously that not all sectors will be affected equally by the need for fiscal consolidation after the next election. This applies to regions too – with some regions and cities more vulnerable to government spending cuts than others. The key differentiators are the relative importance of both public sector employment and private sector production that is dependent on government spending. Based on these factors, the three British regions we identify as most vulnerable are Wales, the North East and Scotland. By contrast, the London region is the least exposed, suggesting its housing market could outperform other regions. The five most vulnerable cities are Durham, Liverpool, Canterbury, Preston and Cambridge.
7 April 2010: Markets may be surprised by sustained recovery
Investors are still viewing the glass as half empty, but fears that recovery will stall as government and central bank stimulus measures are withdrawn may be overblown. We expect further evidence of a revival in private demand, as broader recovery takes over from inventory rebuilding, and this will help risk assets to continue outperforming government bonds. Within the equity markets, this should also favour cyclical over defensive sectors.
6 April 2010: Revival of US business investment
US business investment, which fell by a fifth during the recession, is showing signs of recovery. It made a positive contribution to GDP growth in the fourth quarter (Q4) of 2009, for the first time since Q2 2008. And it looks set to continue contributing to growth – companies are sitting on pile of cash and rising profits mean that CEOs are increasingly confident.
1 April 2010: Will this be the 'spring of discontent?'
Looming strikes at British Airways and National Rail have brought back memories of the ‘winter of discontent,’ with some even predicting a ‘spring of discontent’ this year. However, on closer inspection of the available evidence, another season of discontent seems unlikely at the moment.
March
31 March 2010: Export growth to help UK recovery
So far UK goods exporters have primarily benefited from the marked depreciation of sterling over the past three years through higher margins. But a sustained recovery in world demand, combined with the allure of those increased margins, should boost export volumes as well over the next couple of years. This should in turn make a positive contribution to recovery in the UK economy.
29 March 2010: Looking for a better entry point within a long-term positive view on oil
Oil price to slide this Spring? The current oil price of over $80/bbl appears unsustainable. We hold a positive view of oil prices over the long term, but would prefer to open new positions at around $70/bbl.
19 March 2010: Tempted by inflation? Remember the 1970's
Using high inflation for debt reduction would carry major costs and risks, which reduce the likelihood of policy makers reverting to this solution. High inflation gives rise to distortions in resource allocation, reduces economic growth, hurts the poor, creates social and political instability, is not easily contained when unleashed and leads to substantial output costs that need to be brought down again. Governments are also pushed into shorter maturities, rolling over their debt more often, and borrowing costs go up for many years to come. These are the key lessons of the 1970s for the advanced economies. Nevertheless, a moderate rise in inflation could be part of the policy response to the fiscal crisis.
18 March 2010: Lessons from previous large fiscal adjustments
The task facing advanced economies in shedding their massive debt loads is indeed daunting, but there are precedents for overcoming such a challenge. Ambitious policies for delivering the required adjustment will be needed, as mentioned in our previous Daily Theme. Although this will be the first time that most advanced economies have had to undertake such a large and simultaneous debt reduction, there are several historical examples of individual countries undergoing similar adjustments.
17 March 2010: Queue up for a fiscal exit strategy
Governments around the globe have successfully averted another great depression by providing support to their economies of an unprecedented size and scope. But in the process their balance sheets have deteriorated, their liabilities have expanded and buyers of their debt face increasing risks of future losses. To keep the bond vigilantes at bay, politicians now need to have a convincing plan for ensuring the sustainability of public finances.
15 March 2010: Hedge funds to continue restoring credibility
Despite its recent status as the scapegoat for all that went wrong during the credit crisis, the hedge fund industry as a whole substantially outperformed other risk assets over the period of the downturn and the subsequent recovery. This year hedge funds seem set to further restore their credibility and to add value within a diversified investment portfolio. In what we believe will be an environment of more modest returns for investments generally, against a backdrop of continued volatility, history suggests hedge funds could continue to post favourable gains. Further intervention by monetary and fiscal authorities in many parts of the world is also likely to create attractive opportunities for some hedge fund strategies in particular.
10 March 2010: Impact on UK sectors from looming spending cuts
Although all departments will feel the squeeze after the next election, spending cuts will fall disproportionately on some departments and sectors of the UK economy. Factors such as dependence on government spending, importance of capital spending and protected versus unprotected areas help us to develop a ‘scorecard’ for the most vulnerable sectors. The four sectors we expect to be hardest hit are office machinery & computers (i.e. IT equipment), weapons & ammunition, shipbuilding & repair and aircraft & spacecraft.
9 March 2010: Speculating about currency
In search of a scapegoat for the euro’s rapid decline, the spotlight is on currency speculation. Following accusations by European politicians and media, the US Department of Justice is investigating whether selling of the euro by a number of hedge funds represents illegal collusion. It’s an emotive topic. Currencies are a very obvious symbol of economic status and affect the purchasing power of the voting public. However, we don’t believe there is any merit in trying to trace the cause of the euro’s woes to ‘speculators,’ who follow market trends rather than create them.
3 March 2010: Sterling hangs in the balance
Sterling has taken a beating against the backdrop of economic weakness and the potential for a ‘hung parliament’ after the UK general election, due by June at the latest. RBS’ HiPPO indicator, which measures this risk, suggests an almost two-thirds probability of a hung parliament. This is significant, because it has not occurred following a general election since 1974. The history of that period, with political deadlock and spiralling inflation leading to a sterling crisis, is not a happy comparison. However, while sterling is likely to remain under pressure, the recent drop is modest compared to the one-third drop from over $2 in July 2008 to $1.38 last March. Nor are UK debt markets showing any alarm. A temporary relief rally is even a distinct possibility, although the main support for sterling is that other major currencies share some of the same issues.
February
24 February 2010: The coming UK fiscal consolidation
While there is some debate about when it should begin, there is general agreement that substantial fiscal consolidation through a combination of spending cuts and tax increases will need to take place to maintain the UK’s AAA credit rating. However, given existing commitments by the main political parties to protect significant areas of spending, other departments would have to bear the brunt of the adjustment needed and this would involve enormous cuts to their budgets of between 18-24% in real terms over the course of the next parliament. This is clearly unrealistic. For example, for the Ministry of Defence this would equate to lopping off a branch of the armed forces. In reality, the fiscal consolidation required for the UK can only be achieved by a combination of tax increases, departmental spending cuts and cuts in social security and pension benefits.
11 February 2010: The outlook for the UK's government debt rating
There has been considerable discussion in recent months around the chances of a downgrade of UK government debt from its current AAA rating, and what this could mean for sterling and UK bond markets. Although painful, policy tools are available to make substantial cuts to the budget deficit and avoid such a fate, provided there is enough political will. Indeed, the rating agencies are likely to wait until after the UK general election and the details of a post-election interim budget are announced before making any decision on the UK. A hung parliament would increase uncertainty and the risk that not enough is done to keep the agencies happy. Politicians’ resolve may also need to be stiffened by bond markets first. In the longer term, an environment of weak growth and deflation would pose the biggest threat to the UK’s rating.
8 February 2010: Will Europe defend its periphery?
Markets are in the process of testing the financial and political commitment of the core European countries, primarily Germany and France, to the euro project. For the spreads of Greek, Portuguese and Spanish government bonds to stop widening and reverse course the peripheral countries need to not only have credible plans in place to cut their budget deficits, but markets also need to believe that they have the political will and social cohesion necessary to implement very painful measures. Given that they probably don’t, the most likely outcome is a bailout. This would probably involve the other eurozone countries guaranteeing the debt of the peripheral countries that are coming under pressure. Unfortunately, given the complexities of Eurozone decision making processes, such a guarantee may be some time coming. Markets are not known for their patience.
5 February 2010: S&P's report on the UK banking system
A report last week from ratings agency Standard & Poor’s (S&P) provided some further detail around its decision last December to move UK banks down in its classification system. S&P’s statement that the UK was ‘no longer amongst the most stable and low-risk banking systems’ led to some eye-catching headlines, but the muted market reaction reflected the fact that the agency’s assessment was old news. Sterling did fall after the report, but only by around one cent against both the dollar and the euro.
4 February 2010: Belt tightening lies ahead for major developed economies
Many of the world’s major economies, weighed down by very high levels of debt, are likely to experience a lengthy and painful period of slower growth as they work it off. Although less common, some countries have in the past resorted to default or high inflation as alternative ways of reducing debt burdens. Neither is bond friendly. Nor would either of these extremes be currency friendly for the UK, whose debt is 34% foreign-owned. Other countries facing this deleveraging process include the US, France, Germany, Canada, Spain, and South Korea.
3 February 2010: Industrial metals positive trend intact
After last year’s fantastic performance by industrial metals prices, January recorded the worst monthly returns since December 2008. The doubling of metals spot prices last year has inevitably prompted investors to take profits and review the outlook, especially amid uncertainty surrounding the outlook for a sustainable global economic recovery. While these concerns are valid and likely to produce greater volatility and risk to investing in industrial metals, we believe that the positive trend will continue and forecast that prices will record new post-recession highs, even if gains are more modest than last year’s dramatic bounce-back.
January
29 January 2010: UK inflation spike: how worried should investors be?
City forecasters have been consistently surprised by the strength of UK inflation in recent months, and risks are for more of the same in the short term. The jump in inflation in December leaves it a whisker away from the level where Bank of England Governor, Mervyn King, will have to write an open letter to the Chancellor explaining why it has increased and what he plans to do about it.
26 January 2010: Banking under the Volcker Rule
Like the winter snow, last week’s proposed clampdowns on Wall Street by the Obama administration were a timely reminder that although recession has passed, it has left potholes in the road to recovery. While Obama’s plans could slow the speed of growth, we don’t believe they will cause significant damage.
22 January 2010: As economy shifts to recovery phase, earnings are needed to drive equities higher
The continuing increase in capacity utilisation and the peak in unemployment confirm that the economy has shifted to a recovery phase, as predicted already by our recession probability model. Previous cycles suggest this will mean more muted equity performance compared to last year’s extraordinary rally, as the driver of returns shifts from PE valuations to earnings growth.
21 January 2010: Greece's debt problems to continue to plague the eurozone
Greece’s fiscal problems have figured prominently recently and will continue to plague the eurozone over the course of this year, weighing on the euro. We may see a further spike higher in Greek bond yields, before a way through the crisis is found. Aggressive investors may want to wait for a spike in yields and a crisis event, as an entry point to buy Greek debt.
15 January: Chinese inflation and its potential risks and opportunities
Milton Friedman’s statement that “inflation is always and everywhere a monetary phenomenon” underlines concerns about China, where the money supply has exploded. On the back of official policy encouraging rapid growth in bank lending, money supply is growing at 30%, nearly twice the longer-term trend. With a record 9 trillion yuan of new loans last year, there is plenty of fuel for inflation.
14 January 2010: Two hundred years of history suggests debt crises to follow credit crunch
Historically, defaults have been commonplace and tended to pick up after financial crises. If history is anything to go by, sovereign debt crises are likely to follow on from the high levels of borrowing by major developed and emerging economies, a necessary evil in the effort to jump-start growth. Inflation has also often been used as a means of reducing the real interest burden on governments, and in the post World War II era “default by inflation” among developing economies has become closely correlated with rises in actual debt defaults.
13 January: Ten positive and ten negative surprises for 2010
Having recently criticised the consensus list of potential surprises in 2010 as unimaginative, considering the events of the past two years, here we present our ‘Top 10’ possible positive and negative surprises for the global economy and financial markets this year. We have highlighted the usual suspects, as well as some you may not have seen elsewhere. Most of these possibilities are already priced in to markets to some degree, but with a low probability of occurring. If they turn into reality (or even just look more likely to happen), market pricing would change accordingly. It is worth bearing in mind that given the lack of ammunition policy-makers are left with, even a relatively small negative shock could be hard to manage without significant financial-market impact.
06 January: The financial crisis - a little perspective
With most developed economies now having experienced a quarter or two of growth after a severe and protracted recession, it seems a good time to reflect on the turmoil of the past two years and to measure it against other downturns triggered by financial crises. Using research from Reinhart and Rogoff, we’ve analysed the historical pattern of a raft of data – housing and equity prices, unemployment, GDP and government debt – from the Great Depression and financial crises since World War II to gauge how our recent experience compares.
05 January 2010: Risk in 2010
With the world economy still fragile as it continues to recover from the global liquidity crisis and subsequent recession, it remains vulnerable to further shocks. The nature and likelihood of these risks to recovery is therefore a key concern for investors. However, our scan of other market commentators suggests that most of the risks cited are based on a resurgence of recent problems. While many of these, such as maintaining growth and restoring financial stability, remain obvious and pressing, we are struck by the focus on past problems. An important lesson from the last crisis is that the interaction and interdependency of the global economy has produced vulnerabilities as well as strengths. So the current absorption in past and present problems means that markets are likely to be very vulnerable to unforeseen events and volatility will therefore remain high.
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Outlook 2010 Update
How have events unfolded relative to our 2010 investment outlook.