Ferguson Oliver - Media Centre
Market Perspective From Ferguson Oliver January 2008
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INTERESTING TIMES LIE AHEAD IN 2008
2007 has been an eventful year in world markets. Investor appetite for risk has dramatically
re-rated as weakness in the US housing market has led to increased volatility in both equity
and fixed interest income markets, as well as the impact it has had on property markets.
Whilst the developed economies are bracing themselves for a US-led slowdown, the China
bull story seems to continue apace. Chinese demand remains one of the main props to global
commodity prices and a significant contributor to an oil price of almost $100 per barrel.
Given the increased levels of market uncertainty evident as we move into 2008, one message is
clear: diversification will be essential. Investors should be considering the traditional means of
diversification, by asset class and by geography, but consideration should also be given to
more lateral means of spreading risk. We see moving away from leveraged asset classes as an
important theme for successful investing in the new year. With that in mind, Asia may be one
of the best places to build a market exposure as fewer companies, and consumers, in that
region have embraced the concept of gearing in the same way as their western counterparts.
ECONOMIC OVERVIEW
The global economic picture has changed dramatically during 2007. The year started off
showing strong global growth and rising commodity prices but growth expectations have
weakened since US sub-prime concerns began to take hold in the summer months. The sudden
contraction of credit has affected both markets and, perhaps most importantly,
consumers. Consumer confidence could weaken as the value of financial
assets come under threat.
House prices in the US are already falling; in the
UK, they will at best level off, if not decline (albeit only slightly). It is unclear
whether this has already had an impact on consumer confidence but the
relationship between consumer confidence and property prices is
undeniable—and any bad news about the housing market is sure to dampen
consumer spending which, in turn, could affect business confidence. We have
already seen the most recent business confidence surveys show a downturn.
HEADLINE THEMES:
• Weak consumer confidence posing a tangible threat to global growth.
• Inflation may emerge as a further threat to the global economy
• Diversification will be a key investment strategy
• Mixed outlook for global markets as credit conditions remain tight
• Asia likely to be a bright spot on the back of continuing economic growth
• Eastern property expected to continue to outperform western counterparts
• Fixed income markets may be factoring in too much potential bad news
• Opportunities in credit markets exist on a selective basis
MARKET OVERVIEW
1. Equity Markets: Against an unsettled economic backdrop we believe that 2008 could
produce one of the most interesting years that equity markets have seen in a long time.
The volatility that has swept back into markets through 2007 is unlikely to go away in
2008. Aftershocks from the credit crunch will continue to be felt in the banking sector
and as such avoiding banks might well play an important role in the pursuit of returns.
This said investors in equity markets should still be able to make gains, provided they are
not willing to simply follow the benchmark and invest in funds with an actively managed
portfolio
2. Property Markets: As in other equity sectors, investors in property securities should
expect further volatility in 2008. Whilst the market for commercial property is likely to
deliver negative returns over the next few months, our view is that over the medium to
longer term property should continue to give reasonable risk-adjusted returns and taking
account of the relatively smooth nature of returns relative to equities and the lack of
correlation with other asset types, we believe that commercial property—particularly a
combination of UK and International exposure—has a useful diversification role in most
investor’s portfolios.
3. Fixed Income Markets: Late summer 2007 marked a significant re-pricing of risk in
global fixed income markets. Investors sought refuge away from the fall-out of the US
sub-prime market and its relationship with structured debt. Government bond markets
have strengthened and yields have fallen a long way since then and are
now discounting a series of interest rate cuts that we believe may come
through more slowly than many expect, due to the inflationary concerns.
Accordingly selective issuer and credit selection should still offer
fixed income investors attractive opportunities in the coming year.
CONCLUSION:
The increased market volatility which has been in evidence since summer
2007 is likely to continue. Volatility is not necessarily a bad thing. Oftentimes
it makes it easier to uncover quality investments. However, volatility also
highlights the importance of building a diversified portfolio of assets.
Good, solid, fundamentally sound investment opportunities do still exist in such a
market. At Ferguson Oliver we will be looking to encourage clients to reduce
their exposure to property based funds and increase holdings in fixed interest
and non-equity based funds with absolute or total return funds gaining
favour at present. In addition for those investors who appreciate the
importance of adopting a diversified geographic position we will look to
reduce UK exposure in favour of greater international presence particularly
in the Asian and Emerging Markets. If you have any concerns with your
current position please contact us in order that we can conduct a review and
make suitable recommendations to best align your portfolio for 2008.
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