News
Review of 2009
15/12/2009
Authorities have coddled the world with ultra-low interest rates and huge tax breaks to avert a global depression. by Edward Bonham Carter, CIO of Jupiter Asset Management
While the investment season, like the gardening season, officially begins on January 1st and ends on December 31st, perhaps the best place to start a review of 2009 is mid-August 2008, on holiday with the Chancellor in the Outer Hebrides.
It was there, during a fireside chat, that Alistair Darling told us we were facing "arguably the worst [economic times] in 60 years". For this he was widely derided. Yet the following month saw the nationalisation of two US mortgage giants, the collapse of investment bank Lehman Brothers, the rescue of insurance giant AIG, the sale of Merrill Lynch to Bank of America and an agreement to sell HBOS to Lloyds TSB.
The implosion of the world’s banking system hit "the real world" when credit dried up, causing a sudden and unprecedented collapse in business. By late 2008, companies were reporting that orders had "fallen off a cliff".
By January 2009 there was a daily diet of profits warnings. In February the Governor of the Bank of England confirmed the UK was in a deep recession and the stock market fell sharply on fears the financial crisis was worsening.
Finally, in the spring, world leaders accepted that the only way to get banks lending again was to remove their dud assets and park them safely under a government guarantee.
Markets turned a corner in mid-March. All it took to spark a strong rally was news that several US banks had seen a profitable start to their year. An increasing number of green shoots began to appear; the question was what type of fertiliser was being used on them.
"Quantitative easing" had certainly revived bond markets but, in the UK, many small and medium-sized companies still found it difficult to borrow money, no matter how nicely the Chancellor asked banks to lend more. There is little point in having the benefit of a 25% decline in the value of the pound if our manufacturing companies are unable to take advantage of it because banks will not extend them credit to gear up.
The summer surprised many. The half-empty glass now appeared half-full, spurred on by better-than-expected company profits in the US and Europe. However, much of the boost to profits came from substantial cost cutting rather than higher sales. Economic recovery remained in doubt.
By autumn, central bankers indicated that ultra-low interest rates would be with us well into next year.
Looking ahead, economic growth in the West may well remain anaemic for several years because of the vast accumulation of debt by consumers and governments. Inflation and interest rates could also stay lower for longer as a result, which would provide a positive backdrop for equities and bonds over the medium term.
Turning East, the news flow has been much more encouraging. In 2009, China’s massive reflationary packages boosted domestic demand to their benefit and ours. India saw a stunning election victory for the Congress party. This suggests there will be an acceleration of the reform programme that has been driving Indian growth.
Herein lies the longer-term story. If the two most populous nations on earth continue to enjoy rising living standards then the world should become less reliant on US consumers as its locomotive of growth. Emerging markets should be capable of producing higher returns over the long term than developed markets. But investors must be prepared to tolerate the greater volatility and risks associated with investing in them.
NOTE
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. The group is collectively known as "Jupiter". The above commentary represents the views of the Manager at the time of preparation and may be subject to change. They are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.
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