17th June 2011

Henderson: Multi-Manager update

Concerns about European sovereign debt once again came to the fore during May as Fitch (a ratings agency) downgraded Greece's credit rating and Standard & Poor's announced that Italy's rating was at risk.
European Union authorities have proposed a "soft" restructuring of Greece's debt, but many commentators believe this is still akin to a default. Concerns about Spain's finances were also reignited when the ruling socialist party in Spain suffered heavy defeats in local elections. The fear of contagion through these countries' bonds being held by banks both in core Europe and further afield, weighed on equity markets through the month: global equity prices (as measured by the MSCI World Index) fell by around 1.5%. The spread of performance between regions was reasonably narrow although, unsurprisingly, Europe was the worst region as prices fell by close to 3%.

The recent trend of slowing economic activity continued through the data releases early in May. However, industrial production data and regional US manufacturing surveys released later in the month were lower than economist's expectations, appearing to indicate an acceleration in the slowdown (though much of this data is still consistent with a growing economy albeit at a lacklustre rate). Within equity markets, these disappointments have been met by investors rotating from more cyclically positioned sectors to more defensive sectors: for example, metals and mining underperformed, while pharmaceuticals and tobacco registered positive gains. Attractive yields and reasonable valuations after a period of neglect have also smoothed the transition to these areas of the equity market.

Economic disappointment also impacted government bonds as yields fell (prices rose) fairly consistently throughout the month. US 10-year Treasury yields have fallen close to 3%, the lowest level since late 2010. German government bond yields fell below 3% after the European Central Bank signalled that they would keep interest rates on hold (having raised them from 1% to 1.25% in April, the first hike since July 2008) until they had assessed the economic health of the region.

Against this backdrop it is worth highlighting a rather interesting development witnessed in May in the technology market: the flurry of IPOs. First came Linkedin, one of the first social networks to go public. It listed at $45 per share and the stock subsequently soared to over $120 on its first day of trading. Its debut was so explosive that it led many to remember conditions that led to the tech bubble in the late 1990s. Other technology IPOs in the month included Yandex, the Russian search engine, whose shares shot up more than 55% in their Nasdaq debut and Renren Inc, one of the biggest social networking companies in China, which rose 28.6% in its IPO. And that's not where it ends for technology. Microsoft has recently announced that it will pay $8.5 billion for Skype, and Facebook has been valued at $50 billion, and just last week, voucher website Groupon announced its IPO valuing the company at over $20bn. All in all, it appears to be rather reminiscent, say some, of the dot.com era.

Outlook

As we enter the summer months we continue to navigate markets with caution - acknowledging the headwinds and risks but ready and willing to take advantage of the opportunities as and when they present themselves. There will no doubt be further twists along the way but we remain optimistic on the outlook for equity markets, encouraged by corporate earnings, valuations and investor sentiment which is currently quite poor and typically a good contrarian indicator.
As always we thank you for your continued support.

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