April 2009
It seems as though everyday we are assailed by the media with fresh news about the problems in the British and the world economy and these problems are reflected in the financial markets and investors' savings and investments. We had rather hoped that we had seen the bottom of the market in October 2008, but at the end of March, the Index stood at 3926.
These dramatic changes reflect the perception of the British and American economies. We now know that much of the growth seen in the UK and the USA over the last five year period was based on the government, many companies and many people borrowing too much and this edifice has crumbled under the sheer weight of the accumulated debt.
The Bank of England's efforts to boost economic activity and avoid deflation have had limited success to date and with interest rates now at 0.5%, a record low, the Bank of England has started the process of 'quantitative easing'. Quantitative easing is a euphemism for printing money and one's initial reaction is that this process is likely to have an inflationary impact.
So where is the economy going for the rest of 2009 and beyond? We cannot be sure and it certainly is not showing many "green shoots of recovery" yet. However, in due course a very gradual recovery will begin to take place and as usual, we would expect a rather chastened market to have started to recover in anticipation of this. In the past the market has tended to rally between 6 and 12 months before the gradual improvement in the economy.
The impact of these economic woes on individual portfolios has been a tale of falling share prices, slightly offset by the rising price of gilts. Whilst this has been depressing in itself, our main concern now is to ensure that a reasonable level of income is generated by portfolios.
We continue to believe that it is important that investors hold their nerve and remain invested, adding to their existing holdings of sound companies with modest amounts of debt where appropriate. We will continue to invest in well run international companies, well reserved investment trusts and also some gilts, depending on the investment profile and objectives of the portfolio.
By Manliffe Goodbody, Director of Thorntons Investment Services.
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