Market Matters — April 2010

The Arabic word shaggan has no equivalent in English. It means the power some singers, such as Edith Piaf, have to imbue the lyrics of a song with an inexpressible melancholy; a yearning for better times. Well, the shaggan has worked, it seems. The FTSE-100 index hit its low of 3,640 on 17 March last year. As we write in April, the same index stands comfortably above 5,700.

Will this last? A ‘suckers’ rally’ – or a sound and sustainable one? Seminal reading here is the annual Barclays Capital Equity Gilt Study. It shows that from 1999 - 2009 the total return from both US and UK equities has been negative. The better news is that 10-year performance has been worse only once (1964-74) in the last 110 years; and that each poor/negative period of 10 consecutive years has been followed by a very profitable one (+ some 11% p.a., in real terms.) So we are due a good decade. Or will it be different this time?

In our view the base case is for a patchy economic recovery. But monetary policy is set for economies at large. This means that there are many companies for whom current financial conditions are overly stimulative, leading to super-normal profits. This should be good for talented profit-hunters.

We see two possible outcomes. Many people are talking about a ‘double dip’ recession as a risk. This presupposes either an error of policy - too much ‘tightening’ too early - or a sovereign credit crisis in a major European country (although Japan shows us that countries can live surprisingly long with high ratios of debt to GDP).

The other possible outcome gets much less attention: a recovery which is stronger than expected. The consumer starts spending again, the savings ratio falls and China goes back to exporting consumer goods to the Anglo-Saxon world.

Our sense is that of the two outcomes above, the second is more likely. If that is right, then the outlook for equities is good. Of course there will be volatility, not least because a strong economic recovery would prompt central banks to begin removing stimulus and increasing interest rates. But the runes, we think, are reading well.

 

Any research or analysis contained in this document has been procured by Artemis for its own use and may be acted on in that connection. The contents of the document are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. The document may include forward-looking statements which are based on Artemis's current opinions, expectations and projections. It is provided to you only incidentally, and any opinions expressed are subject to change without notice.

Potential investors should consider the need for independent financial advice.

* All data is sourced internally as at 05/11/2009 unless otherwise stated.

Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk), 25 The North Colonnade, Canary Wharf, London E14 5HS and is a member of the IMA. Artemis Fund Managers Ltd is a member of the Artemis Marketing Group. We only market our own unit trusts. Please remember that past performance is not a guide to future performance. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency valuations and you may not get back the amount originally invested.

Any research or analysis contained in this document has been procured by Artemis for its own use and may be acted on in that connection. The contents of the document are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. The document may include forward-looking statements which are based on Artemis’s current opinions, expectations and projections. It is provided to you only incidentally, and any opinions expressed are subject to change without notice.

Potential investors should consider the need for independent financial advice.