The Word from Hansard, 16th June 2009

The Word from Hansard

Group of Eight finance ministers began drawing up contingency plans for rolling back budget deficits and bank bailouts as the economy shows signs of recovery and investors start worrying about inflation. Officials meeting in Lecce, Italy, over the weekend said it’s prudent to consider what exit strategies to deploy once global growth is secured and asked the International Monetary fund to examine how to do so without endangering the progress which has been made so far. At the same time, they said it’s premature to rein back more than USD 2 trillion in stimulus packages. "Growth should remain the principal focus of policy," US Treasury Secretary Timothy Geithner said after the meeting. "It is too early to shift toward policy restraint."

Brazil, Russia, India and China are considering buying each other’s bonds and swapping currencies to lessen dependence on the US dollar. Dmitry Medvedev, Russia’s President, who is hosting a meeting of the counties this week said, "There can be no successful currency system if the financial instruments that are used are denominated in only one currency. Today this is the case and the currency is the dollar."

UK inflation slowed less than economists forecast in May after higher taxes and the weakness of the pound sustained price pressures in the economy. Consumer prices rose 2.2% from a year earlier, compared with 2.3% in April, the Office for National Statistics said on Tuesday in London. Inflation has been "sticky" because of the UK currency’s drop in the past year," Bank of England markets director Paul Fisher said last week. Policy makers still predict it will slow further and are spending 125 billion pounds (USD 204 billion) of newly printed money in UK debt markets to prevent deflation taking hold.

The yen rose against higher yielding currencies and advanced the most in two weeks versus the dollar as stocks declined and the Bank of Japan said the nation’s recession is easing. The dollar fell for a second day against the yen on concerns that the leaders of Brazil, Russia, India and China will call for less reliance on the dollar as the world’s currency at a meeting to be held on Tuesday. The yen climbed to 133.46 per euro in London On Tuesday from 134.99 in New York on Monday. It advanced 1.5% to 96.35 per dollar, the biggest gain since 29 May. The euro rose to USD 1.3853 from USD 1.3803 and climbed to 84.83 British pence from 84.57 pence.

European car sales in May fell at the slowest rate this year as government-backed incentives helped reverse declines at Volkswagen AG and Fiat SpA. New car registrations slid 4.9% to 1.27 million, a thirteenth consecutive monthly drop, the Brussels-based European Automobile Manufacturers’ Association said in a statement on Tuesday. State-funded sales and trade-in subsidies have shifted European demand toward smaller and more fuel efficient models. Global sales by Volkswagen, Europe’s biggest carmaker, rose for the first time in eight months in May. Declines of 39% in Spain and 25% in the UK led the European sales contraction. The decline was tempered by a 40% increase in Germany, Europe’s largest market, and a 12% gain in France.

Spotlight on the long-term benefits of equities

There are compelling reasons why it makes sense for investors to re-enter equity markets, despite the remarkable volatility that has been seen for the past 18 months, insists Legal & General’s Mark Burgess. The head of active equities and corporate governance believes the combination of low stock prices and the prospect of a recovery towards the end of 2009 makes it an extremely attractive time to invest in equities.

There are also longer-term arguments in favour of equities. As well as being an effective hedge against inflation, history has shown that staying fully invested in equities rather than constantly trading, has tended to result in significantly better returns. "Equities have certainly become an overlooked asset class," says Burgess. "We can understand the recent focus on the fixed income markets, but it’s important not to forget about the long-term benefits of investing in equities." Restocking inventories and government stimulus packages are likely to kickstart the global economy according to Burgess.

"Equity markets around the world have performed very poorly and now look historically attractive, both in absolute terms and in comparison to bonds," says Burgess. He also suggests we should be learning from the past. "Equities have delivered superior returns versus other asset classes over the longer-term," he says. "This is especially true when adjusted for inflation."

Equities historically have significantly outperformed cash and bonds on an inflation-adjusted basis. Despite recent stock market volatility, this is still true. If you had put GBP 100 into equities back in January 1979 it would have been worth GBP 912 at the end of 2008, whereas a similar investment in bonds and cash would have increased to a more modest GBP 572 and GBP 237, respectively. While inflation is unlikely to be a troubling scenario in the short-term, quantitative easing and low interest rates will be quite inflationary over the medium term.

Burgess expects the market to continue to be extremely volatile for the next few years, and he believes attempts to time the market are misguided. "If you try to be smart you can end up missing out on potential positive returns," he adds. "Those who try to trade and get it wrong can really end up missing out."

Being out of the market during key times significantly reduces equity market returns over time. For example, if an investor had invested GBP 100 back in 1979 and kept it fully invested, it would now be worth GBP 1,008, allowing for inflation. If they had tried to time the market and missed the best 10 months, however, then their return would be worth just GBP 378 today. Being fully invested would have led to nearly three times the return versus trying to time the market perfectly. Burgess concludes that the most effective technique is to buy and hold equities for the long-term.

Hansard has launched a new protected fund, the Hansard Multi-Asset Protector.

The investment objective of this new protected fund is to provide protected capital appreciation through investment in a basket of assets with exposure mainly to global equity and debt markets. The investment in a range of asset classes, with allocation across different markets and sectors, is designed to provide an appropriate level of diversification. The fund will provide a minimum level of protection of 80% of the highest ever Net Asset Value (NAV) and the opportunity to benefit from unlimited growth potential of global financial markets. It is designed to deliver capital growth whilst reducing volatility and limiting downside risk.

The fund is available in four currencies: US dollar, euro, British pounds and Norwegian Kroner. For further details please consult your Hansard Account Executive who will be able to assist you further.

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Hansard can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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