Market Report 2 Q 2009 Global equity markets have failed decisively to break through key resistance levels (with the exception of Japan), having enjoyed a powerful rally from the lows experienced in early March 2009. To a greater extent, equity markets are now fully discounting a pronounced revival in economic activity, a revival which is not yet confirmed by economic data releases. Certainly activity levels have picked up, largely driven by re-stocking in the wake of marked inventory run-downs earlier in the year. Furthermore, the jury is out as to the impact of the gigantic fiscal and monetary stimulus on global economic activity. Stockmarket bulls hope that it will contribute meaningfully to a continued revival from trough levels experienced in Q4 2008 and early 2009. This may yet prove optimistic given the significant structural impediments to a “V” shaped recovery remain in place. Deleverage remains a feature and is likely to continue to impart a negative influence on household spending. Aggressively indebted Western governments are more likely to curb than increase spending. Therefore it seems unlikely that activity will return to the strong growth levels achieved over the past decade; a period during which credit was both cheap and freely available. The rise in government gilt yields is also highly significant. At present, it seems that this development has as much to do with market concerns regarding increased issuance as it does with incipient inflationary pressure. Sufficient spare capacity exists that should in theory ensure that inflation remains quiescent for a significant period of time. However, the role of the Chinese in the equation complicates the matter. Their drive to diversify out of paper US Dollars and into tangible assets such as commodities and oil raises the nasty prospect of rising commodity prices at a time of anaemic economic growth. Short-term interest rates are likely to remain anchored at ultra-low levels and the steeply rising yield curve is regarded by the bulls as a clear indication of economic recovery c4-6 quarters ahead. However, further quantitative easing measures are likely to be required, despite clear uncertainty regarding its long-term impact, to give economic recovery the best possible chance of becoming embedded. The best performing major UK equity sectors in Q2 were banks, life insurance, financials, mining, and technology. In particular, Vedanta (+93%), Barclays (+89%), Kazakhmys (+73%) and RBS (+59%) stand out. In the quarter, banks passed FSA stress tests and the threat of nationalisation receded. Furthermore, extremely loose monetary policy is supporting the profitability of banks and thus helping to stabilise the macro outlook. In addition, the banks have been implementing self-help policies. Barclays sold BGI for £8bn, RBS raised £5.4bn by asset sales and HSBC completed a £12.5bn rights issue. Mining stocks benefited from a recovery in commodity prices helped by improved Chinese demand. Rio Tinto rejected Chinalco’s proposed £12bn investment in favour of a rights issue and a tie-up with BHP. The worst performing areas in Q2 were telecoms, oil & gas producers and largely defensives such as tobacco, healthcare and food & drug retailers. Vodafone slipped as it failed to meet profit expectations and it increased provisions. After reporting a loss of £134m, BT cut its dividend by 59% and plans 15,000 job cuts. In total, FTSE 100 dividend payouts have fallen by 19%.

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