Recovery is in the air. Few are throwing their caps sky high to celebrate in the world beyond the excitable financial markets. German and French GDP came in a little higher in the second quarter of 2009, whilst the UK continued to fall. Most commentators anticipate a weak recovery starting in the second half of 2009, as they expect stock reductions to end. The Franco-German economies have been helped by import substitution and the government schemes to stimulate more car buying.
Some company results on both sides of the Atlantic are better than expected by market analysts, largely owing to bigger cost reductions. Commodity prices have been moving up, as China buys her needs forward, and as investment and speculative money moves in early. Oil production has fallen, and sugar is in short supply. Shares in emerging markets have been outperforming advanced country markets, as investors respond to the likely prospects of faster growth there during any recovery. Large funds in both the UK and the US remain very light in Asia and emerging markets, and are realising they ought to adjust their positions.
The negatives are still plentiful, but being ignored on the back of a wave of money from quantitative easing in the US and UK, and money from China and India as their authorities keep things loose and easy. In the UK unemployment is rising inexorably, and is expected to go above the 3 million mark by most commentators this winter. That is not a good background for either consumer spending and confidence or for house prices. In the US there are still doubts about the health of the real estate market in many parts of the country, whilst in both countries incomes are being squeezed. The UK and US public sector deficits continue to climb, with both governments committed to high spending policies against the background of weak revenues. Both the US and the UK are continuing with their quantitative easing programmes. The UK one is larger and they have the bigger problem of adjustment once they decide to bring it to an end. Many final salary pension funds are in deficit. We should expect further rounds of closing schemes to new members and even to further contribution from existing members, as companies try to cut their pensions risks.
We remain committed to a combination of high grade corporate bonds and Asian and emerging market equity for discretionary accounts. The corporate bonds have been appreciating gently in recent days, to add to their attractive yields. More has to be done to tackle the large trade imbalances and government deficits in the major western debtor economies. There are better opportunities for investors elsewhere, without those same risks.