WEEK ENDING 4 SEPTEMBER 2009

A recurring theme in economic circles is the letter of the alphabet that will best illustrate the expected course of economic growth in the months and years following the global recession. The twelfth letter of the alphabet has been cited as very much an unwelcome outcome, with the twenty third letter also a popular prediction. At the moment it seems as if equity markets are pricing in a good old V, the twenty second letter of the alphabet. Bond markets on the other hand predict
that the world wide economy may at best be in for a long and slow trudge back to its former glory. In spi t e of im p roving global economic data US Treasury yields rallied by 50 basis points in August, indicating that the ‘wall of money’ that remains in the system is still being invested, but perhaps in less risky assets than was the case in previous months.


The main question is whether the current quantitative easing (see graph alongside) will last long enough to get the world economy up to speed and less dependent on government spending. In athletic terms it is simple – will the private consumer and industry be ready (and willing) to take on the economic growth baton when Obama and co starts to run out of fiscal stimulus steam? Only time will tell ...

In markets equities sold off across the globe with the Topix in Japan giving up around 3.5% during the week, and the main equity indices in the US, Europe and UK all down more than one percent when measured in the local currency. This followed significant declines on the first day of the month, followed by a bit of a recovery later in the week. Bonds in the United States were broadly stronger as the 10 year Treasury hovered around the 3.4% level and the spread of investment grade and high yield bonds over treasuries contracted somewhat. Global convertible bonds were slightly more subdued compared to earlier in the year and the weak equity markets caused a slight decline in this asset class.

More notable moves took place in the property and commodity markets. Both of these asset classes are traditionally stronger performers later in the economic cycle and when inflation is a concern. In the US property securities gave up nearly 6%, with broad commodities down 4.2% and oil pulling back a little over 5%. Agricultural commodities, which from our point of view could provide an effective hedge against inflation, gave up 3.5% last week and for the year to date continues to be the worst performing broad asset class of those that we monitor.

With Labour Day weekend in the United States and a quiet week with respect to US economic data releases,
markets this week may be looking for clear direction.

Source: RMB Asset Management / Bloomberg / Lipper Hindsight. September 2009

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Wealth Management Group 2009