Market commentary - Quarter 3 2009
The past quarter was one of the strongest on record for equity markets. Here in the UK the FTSE 100 gained 20.82%, while the FT All Share Index rose by 21.30%. This outpaced the US where the S&P 500 rose by 15.4% and Europe, which managed a gain of 17.3%. Investors have been drawn back to equities as a result of an improving economic outlook and expectations that interest rates will remain low for some considerable time, as governments seek to boost their economies through a combination of fiscal and monetary stimulus on a quite unprecedented scale.
The banking sector put in rises of between 30% (Barclays) and almost 50% (Lloyds) in a relief rally as we reached the one year anniversary of the Lehman Brothers collapse. The troubled assets remain, however, and bank bailouts are being replaced by schemes such as, in the case of Barclays, a sale of those assets to a newly created fund, Protium Finance, to be funded by $450m equity and a $12.6bn loan from Barclays. Other UK banks are looking at divesting non-core assets and participation in the government asset protection scheme (GAPS). The taxpayer’s stake in Lloyds is believed to be likely to rise to 60% from 40% on participation in GAPS while for RBS it would increase to 84% from 70%. Whatever method is used it is clear that the toxic nature of bank balance sheets ensures the risk profile will remain high.
With valuations proving attractive at the beginning of this quarter, bid speculation and activity helped lift a number of stocks. Cadbury rose 55% on announcement of the cash and share offer by Kraft Foods of the US, worth about 745p at the time of announcement. With this rejected, Kraft now has until 9 November to come back with a new approach. British Airways shares rose some 70% on possibilities of alliances with Iberia and American Airlines, although any such partnership would be subject to EU antitrust rules. The insurance sector benefited from talk of consolidation and Legal & General rose by over 50%, closely followed by Prudential; while Aviva and Friends Provident (on receipt of a bid by Resolution) also saw double digit rises.
The mining sector also shone with gains ranging from 25% for BHP Billiton to 70% for Kazakhmys. The sector benefited from firmer commodity prices and continued faith in the China growth story, while Kazakhmys also announced results which exceeded expectations leading to broker upgrades. The oil majors also performed relatively strongly with average rises of 15%. During the quarter the oil price rose to its highest level for a year at almost US$75 per barrel as hopes for economic recovery soared, although this tailed off towards the end of the period as a note of realism crept in.
Government stocks saw a modest rise over the quarter, which, against a backdrop of a strongly rising equity market is reflective of the ongoing tussle between bulls and bears. It is unlikely that both can be correct and indeed the bond market has historically been a more accurate predictor of economic outcomes than the equity market. Consequently, we remain cautious, particularly following such a strong run-up in the market as we have seen of late.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.