Danske Bank Investment Centre
Investment Commentary
March 2013
Danske Bank Investment Centre
Investment Commentary
Investment Commentary – March 2013
Global equities have rallied strongly in the first quarter of 2013,
despite ongoing concerns in many of the world’s developed economies.
The key question for most investors, as recently posed by the Financial
Times is; are we at the top of the mountain or at the foothills? Our view
is that we are beginning a journey for equities that will see further
bumps in the road, but that this market recovery is more soundly
based than that experienced in the mid 2000’s before the financial
crisis hit.
The UK's main concern has been the depreciation of Sterling against many of the world’s
leading currencies. Sterling has fallen over 7% against the US Dollar in the first quarter of
the year. This has fuelled fears of ‘stagflation’ again. Stagflation occurs when the economy
suffers from higher inflation (as Sterling falls in value imported goods become more
expensive) and there is little or no underlying economic growth. As inflation rises, the
purchasing power of saver’s fixed capital falls. The recent decline in Sterling has been
triggered by the generally weak UK economy, the recent loss of its safe haven status as the
Euro Zone crisis faded and also the resolve around the US fiscal cliff has worked to increase
the relative attractiveness of their debt. The Bank of England Governor, Mervin King has
stepped into the debate saying he now believes sterling is properly valued. Analysts, however,
have predicted further modest falls to $1.45 and €0.90.
The US is in stronger shape as its banking sector now has significantly higher capital
adequacy ratios in place than in 2007. The US housing market is now at fair value on a
historic basis and showing some tentative signs of recovery. US company profits have
strengthened and balance sheets remain strong, providing a stable platform for further
market growth.
European markets have risen and we have benefited from our positive allocation to the
region. We believe that at current levels there remains further upside potential. This
potential is not without a degree of risk (such as the recent banking crisis in Cyprus) as the
Euro Zone still has some fundamental concerns to address.
In comparison with UK sovereign bonds, UK equities look relatively attractive. In 2007, the
10 year Gilt was yielding 5.5% compared to its current level below 2%. The earnings yield
(anticipated earnings per share divided by the share price) from the top 350 listed
companies in the UK compares favourably with this, currently at 5.3%, of which 3.5% is being
returned to shareholders in the form of dividends.
Danske Bank Investment Centre
Investment Commentary
Clearly large ‘macro’ risks remain, ongoing issues in the Euro Zone (most recently in Cyprus)
and the removal of QE in the UK or the US could see bond prices fall, providing more attractive
yields and making equities less attractive. Positive catalysts also exist and we believe will
prevail. When governments begin to raise interest rates (as they will eventually have to do)
investors are likely to sell more bonds and buy more equities. This move, already being driven
by the existing low return on UK and US government bonds, is becoming known as ‘the great
rotation’.
Markets will likely remain volatile in the short term as the next piece of economic news
breaks, however the fundamentals look stronger than they did following the last two market
peaks and we have positioned our client portfolios to continue to cautiously favour equities
and higher yielding bonds.
Mark Arndell ACIS, MCSI
Chartered Wealth Manager
Manager, Investment Centre
Danske Bank is a trading name of Northern Bank Limited which
is authorised and regulated by the Financial Services Authority.
Registered in Northern Ireland (registered number R568).
Registered Office: Donegall Square West, Belfast BT1 6JS
www.danskebank.co.uk
This is the opinion of Danske Bank, on occasion based upon
research conducted at the time and obtained from sources
believed to be reliable. This may be subject to change without
notice and is not a personal recommendation.