Global market update

July saw a huge re-embracing of risk assets after the weakness in June. This was prompted at first by better economic news – though this had started to wane by the end of the month – and there were also some high-profile corporate earnings announcements, which gave equity markets a boost.

Equities were the top-performing asset class in July, with the UK the place to be. US equities also did well, while European equities performed roughly in line and Japanese equities saw weaker performance. Corporate bonds were largely flat and government bonds fell slightly on the month.

Equities were initially given a boost by an International Monetary Fund report that raised global growth forecasts from 4.2% to 4.6%. The UK was one of the few countries where growth prospects were downgraded, but the change had been largely expected on the back of the ‘austerity’ Budget in June. There was also better news from Europe where PMI data showed improved confidence in the manufacturing sector while the weaker euro finally seemed to be feeding into positive growth for companies in the region.

But the good economic news did not hold up. Mid-month, Federal Reserve chairman Ben Bernanke said economic conditions were “unusually uncertain” and the struggling banking sector and near-collapse in the Greek economy were delaying a US recovery. And so it proved at the end of the month when US GDP growth figures came in behind expectations – the economy grew at an annualised pace of 2.4%, compared to expectations of 2.7%.

There was also bad news from China as the announcement the country’s growth had slowed to “just” 10.3% – from its previous level of 11.9% – spooked economists. The more optimistic pointed out this was a natural consequence of Beijing’s strategy of withdrawing its stimulus packages and tightening monetary policy, but it still raised fears of a double-dip.

Back in Europe, the much-anticipated banking stress tests proved something of a damp squib. There were few surprises and most analysts thought them insufficiently rigorous, which means they essentially failed in their primary aim – of restoring confidence in the sector.

So why did equities hold up? Principally, the strength of corporate profits continued to support prices. July saw the start of the second-quarter reporting season and early signs were promising. Shell and Exxon, for example, saw a near-doubling of profits, which helped ride out the worsening economic news.

How to build your portfolio

The word 'portfolio' is simply a shorthand term for the collection of investments you own across all your accounts. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that your specific objectives. The process of deciding how much to invest in each asset class is known as asset allocation. For example, equities have traditionally offered higher returns over the long term but at the price of increased risk while, at the other end of the scale, cash has offered both security of capital and stability but with a fluctuating income and no chance of capital growth. Actual returns are dependant on many variables, such as the health of the economy in which you are invested, inflation, interest rates and market sentiment. The elements that impact each asset class vary and as a result, one asset might be doing very well at the exact same time another is doing badly. However, it is difficult to predict which one will be doing well - or badly - at any one time. Hence, if you mix the asset classes together and have a little bit of exposure to each, this can help balance out the peaks and troughs of the individuals. Your age, your financial position and your attitude to risk are all crucial considerations to make sure you get the proportions right and build the most appropriate portfolio. It is therefore helpful to speak to an expert who can more easily help you achieve the right mix.

A new political dawn

After a couple of nail-chewing weeks, the UK finally has a new government. It may not be quite what markets would have wished for - equally it is not as bad as they might have feared. But this is unchartered territory with the UK coping with an economic crisis and a political set-up not seen for a generation. Do investors need to prepare themselves for a bumpy ride? Or are the new government’s policies likely to bring stability? First, it must be said that some measure of certainty is welcome. Markets hate uncertainty and the mere fact that a government has been formed has allowed them to concentrate on other areas (like the crisis in the Eurozone). The pound has seen a small rally against the Euro since the election, though this may be more a function of the potential weakness across Continental Europe than a vote of confidence in the new government. More certainty of government is good for gilts, as is the fact that all the major rating agencies said that the outcome of the election had not changed their view on the outlook for the UK. That said, many other problems remain: Over-supply continues to be an issue and the rating agencies may not look so favourably if credible steps are not taking relatively quickly to deal with the deficit. All eyes will be on the new budget on 22nd June. Coalition is not a disaster. Markets had expected a hung parliament and the current compromise is probably as good as they could have hoped for. The true extent of the compromise is unlikely to be seen until the first budget. Watch this space.

What does it mean?

What does our new coalition Government mean for your financial plans? The UK economy is running an unprecedented deficit so we can be sure that somewhere, one or two taxes will rise. In the spirit of compromise, there will be no imminent rise in the Inheritance Tax threshold and the priority is instead a rise personal income tax allowances. Alongside, however, the Prime Minister has given indications that there maybe changes to Capital Gains Tax coming. Rumour also has it there will be rises in VAT. Until we see the Budget Statement on the 22 June, we will not know anything for sure. However, now may be a good time to start a review of your own plans so you are ready to make a change should that be required.

Cautious Managed is top-selling

Cofunds have announced that the top-selling sector for the fourth quarter of 2009 was the Cautious Managed sector. They also stated that whilst the Jupiter Merlin range had historically dominated, new multi-manager names, like Thames River Capital and Henderson New Star were featuring.

The contents of this Blog do not consitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.