Market volitilty continues

After a couple of weeks of declines, markets managed to recover a bit last week, although they appear to remain mired in the same sloppy trading pattern they have been in for the last month. For the week, the Dow Jones Industrial Average gained 1.4% to 13,029 and the S&P 500 Index advanced 0.6% to 1,378. In contrast, the Nasdaq Composite fell 0.4% to 3,000 due in large part to a sharp decline in Apple’s stock price.

Global Outlook

To date, ECB liquidity provisions have removed some of the excessive pessimism surrounding the eurozone growth outlook. Meanwhile, other regions such as the US and Asia are broadly in line with investors’ generally positive growth expectations, albeit that risks generally remain on the downside. If commodity prices, such as oil, were to gain strongly from here, it could add to upside inflation risks; otherwise it is likely that inflation pressures will remain reasonably modest. Currency strength continues to be resisted by most countries – in some cases, actively so – and this is a sign that inflationary pressures remain modest.

Short-term interest rates remain at emergency levels in the US with the Fed intending to keep these levels until late 2014. Elsewhere, central banks are either neutral in their stance or have embarked on more easing measures. The ECB is officially on hold at the moment but another rate reduction can’t yet be ruled out at some stage this year. Nonetheless, low rates will also be maintained by it for some time to come.

Some stress has returned to peripheral bond markets following a period of outperformance versus German bonds. For instance, Spanish bonds have lost most of their recent out performance, while even French bonds have also underperformed of late. Irish bonds are dominated by an alarmingly positive consensus amongst bond investors (which is somewhat disconcerting). Investors, meanwhile, have ignored the Greek debt default and restructuring, something that could yet come back to influence market sentiment. The global backdrop – low short rates, central bank buying and disinflation concerns – suggests that long-term interest rates in major developed countries are likely to stay very low for a further considerable period of time.

Global equities in euro terms have risen by a very healthy 7.7% so far this year, although the recent market action has been softer. Valuations are reasonable but the markets’ strength was due to better macroeconomic sentiment rather than valuations or earnings. Investors have become a little cautious in the past month, driven by more even-handed economic data (rather than the earlier positive data bias) and the return of some nervousness regarding the sovereign/bank nexus in the eurozone. While US earnings’ data has been positive, negative eurozone developments are dominating sentiment in Europe for now. We had expected volatility to return at some stage and this remains the case.

Next Steps for Policymakers

Although the global economic and market backdrop certainly appears better than it did during the credit crisis, improvements have been slow and confidence remains shaken. Businesses, consumers and investors around the world are wary and remain on the lookout for signs of double dip recessions and market selloffs. While such attitudes are common during economic recoveries, the magnitude this time around appears well above normal. These attitudes are hardly surprising, given that deleveraging forces remain high and the global risks of deflation are still present. In this sort of environment, the onus is falling on policymakers to provide continued assurance that they are committed to erring on the side of reinflation until well after the economy has shifted into a self-sustaining expansion.

Since late in 2011, all of the world’s major central banks have clearly affirmed their resolve to sustain the economic recovery and keep interest rates low. The problem, however, is that central banks on their own cannot address all of the issues. In particular, many politicians and governments in Europe have been slower to act in helping to solve that region’s debt crisis. While some of the lack of decisive action can be blamed on ongoing election campaigns it is nonetheless disappointing. Since last year, the European Central Bank has been quite aggressive in terms of attempting to promote
liquidity, but the overall progress in that region has been slow and inconsistent.

Policy and Stocks Are Linked

Even a cursory look at stock market performance over the last several months shows how important global monetary and fiscal policy can be. The rally that started late last year and that persisted until about a month ago was triggered at least in part by the ECB’s announcements that it would become more aggressive in terms of promoting growth and liquidity. Taking a further look back, it seems clear that the 2010 downturn in stock prices ended when the Federal Reserve announced its QE2 program and the 2011 selloff was halted by some forceful action from both the Fed and the ECB.
The world’s central banks have drastically expanded their balance sheets and there is ample liquidity available. The issue is that this liquidity has been slow to move into the real economy since banks have been reluctant to lend and since private-sector credit demand has been weak. As the global economy continues to heal, however, money and credit growth is starting to improve (more so in the United States than in Europe or Japan), which is a positive sign.

Currencies

Strong earnings and economic data helped the appetite for risk and higher-yielding currencies to rise. This resulted in the €/$ rate ending the week at 1.32, 1% higher over the week.

Oil & gold

In commodity markets, oil gained as the week progressed as a result of economic data releases which caused speculation that European economies may be strengthening. The price ended the week at $103 a barrel, a marginal rise on the week. Gold finished the week over 1% lower.

Bonds

Spanish bonds fell for their seventh consecutive week as the G20 cited Europe’s debt crisis as the main threat to global growth. German bunds saw a weekly gain pared followed the release of stronger-than-expected data for the country. The Merrill Lynch over 5 year government bond index ended the week 0.5% lower

About

Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

5 things the recession has taught us

It’s said that we learn more from our mistakes than from our successes. If that’s the case then smart investors and savers have a lot to learn from the trials and tribulations of the Irish economy over the last few years. With a challenging few years ahead of us we need to re-evaluate where we are when it comes to managing our assets.

Property is not always the answer

Given the events of recent years this point now seems like a bad joke but it’s an important one and one that we should striving never to repeat. The rapid expansion in the country’s prosperity and population in the late-1990s drove the value of Irish property through the roof. Many people stopped seeing their houses as homes and began to view them as assets to be bought and sold in a bid to capitalise on rising values. ‘Unlocking the value’ became the buzzword along streets, avenues, estates, highways, byways, backstreets and boreens nationwide.

Investors began to use whatever money they had available to snap up apartments and houses across the land, banking substantial profits on sales; profits which were fed back into the market to buy more properties. No longer was it enough to own the family home plus another property as a ‘nest egg’, people began to speak about their property portfolios. For many amateur investors there was quite simply no other show in town.

But the show quite simply couldn’t go on. When the property market stalled in 2007 and then began it’s downward plunge, many property investors were left with assets that they simply couldn’t sell. Those that did sell were more often than not left nursing big losses. Seemingly bullet-proof and future-proof, Irish property as an investment asset quite simply proved not to be market-proof: in short, it has its up and downs just like any other asset and right now it’s on a major downer.

Diversify, diversify, diversify

If the dramatic collapse of the Irish property market taught us anything, it taught us the value of diversification. Many Irish property investors appeared to focus their attentions and money on just the one asset: property. This left them over-exposed to the market’s 2007 collapse as they were unable to counter-balance the fall in values with a rise in the value of other investment assets and sectors.

Even investing in Irish shares wasn’t a good diversification strategy, because construction and property-related stocks accounted for a sizeable proportion of the Irish stock market. These assets were heavily-correlated which meant that they would experience their ups and downs at the same time. Effective diversification involves the selection of investment assets which are uncorrelated – different assets types such as a mixture of stocks, currencies, bonds and property, and different territories such as Ireland, Europe, the Far East and emerging economies such as the BRIC countries of Brazil, Russia, India and China.

Nothing is certain – so protect what you’ve got

For years the Irish economy and its citizens seemed certain to always be facing a bright future. Jobs and money were easy to come by and prosperity was more widespread than ever before. Many seemed convinced that things would stay like that forever. But as we saw with the economic downturn, life can sometimes take a turn for the worse. Like the savvy investor who keeps a lump sum of cash on deposit for a rainy day, the savvy citizen would be well advised to protect the things and people who are most valuable to them: their income with Income Protection, their loved-ones’ lifestyles with Specified Serious Illness Cover and Life Assurance. Protection like this offers enormous financial peace of mind in these already stressful times.

Never, ever believe the hype

Word of mouth is a dangerous thing. When an investment is going well for someone they are often eager to tell others about it, partly to share the news of their good fortune but also because it can work to increase the value of the investment itself by increasing demand for it. The same people will be less eager to share news of an under-performing investment, partly out of embarrassment but also because it can work to drive down its value by lowering demand for it. So many people invested in Irish property simply because it’s worth as an investment proposition was talked up so much, very often by those with vested interests. This is an example of why you should bypass any hype surrounding an investment proposition by going straight to your independent financial adviser and getting the real, honest facts before making any decisions.

Saving and investing is the way forward

So much of the perceived wealth generated by the Celtic Tiger economy was actually money borrowed against the value of capital assets. From householders re-mortgaging to ‘unlock the value’ of their homes to developers borrowing on the strength of rising land values, relatively easy access to credit was driving much of the economy. With the supply of such easy credit at a standstill and unlikely to return to Celtic Tiger levels, saving and investing your money with the prospect of earning a real return is the smart and secure route to a sound financial future.

About

Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

Another Downturn for Stocks

Once again, risk assets struggled last week with most investors blaming the downturn on re-ignition of concerns over the European debt crisis brought about by a disappointing debt auction in Spain. For the week, the Dow Jones Industrial Average fell 1.6% to 12,849, the S&P 500 Index declined 2.0% to 1,370 and the Nasdaq Composite dropped2.3% to 3,011.

Does History Repeat?

Last year around this time, stocks were coming off an impressive first quarter, but were headed for trouble. Higher oil prices, the earthquake in Japan and the concerns over the US debt ceiling all conspired to cause a sharp turnaround in risk assets. So far this year, stocks have been following a somewhat similar pattern as early strength for equities appears to be fading somewhat. So, it is worth asking the question: Will 2012 look like 2011?

There are some aspects of the financial and economic backdrop that do look similar between the two years. In addition to the flare ups in Europe regarding debt problems, we are currently in the midst of a period of rising energy prices. Oil prices in particular are getting close to last year’s peaks. We are also seeing some renewed weakness in the US economic data—the pace of jobs growth slowed in March and consumer confidence levels have been looking softer. Should oil prices continue to rise, it would be reasonable to fear that the spillover effect onto the rest of the economy would worsen.

It would be a mistake, however, to look too closely to 2011 as a model for what might happen this year. For starters, current expectations for both the economy and the markets are worse than they were at this point last year. In early 2011, investors were pricing in a better economic environment than what would ultimately come to pass. In contrast, at this point the markets are already priced for relatively modest levels of growth, suggesting that there is less room for downside disappointments. Additionally, the fundamental strength of the US economy is better now than it was one year ago. Notwithstanding last month’s data, the labour market is stronger than it was, housing appears to be bottoming and US credit conditions have been improving. Finally, it is important to remember that the recovery and market strength last year were, to some extent, derailed by the natural disasters in Japan and by S&P’s credit downgrade of the United States. While external shocks are always a risk, we can hope that these sorts of factors will not be repeated.

Global Outlook

Earlier in 2012, higher risk investments were supported by better US economic data and by ECB liquidity provisions. Investors put less stress on growth risks in Europe or elsewhere, although more recently some such concerns have re-emerged. While higher oil prices or a surge in other commodity prices could add to upside inflation risks, it is otherwise likely that inflation pressures should remain
reasonably modest. Currency strength continues to be resisted and this is normally a sign that inflationary pressures will remain low.

Short-term interest rates remain at emergency levels in the US and the Fed has stated its intention to keep these levels until late 2014. Elsewhere, central banks are either neutral in their stance or have embarked on easing measures. Investors now think that another ECB rate reduction is not likely but, nonetheless, expect that low rates will be maintained by it for some time to come, given that economic and financial market conditions continue to require easy policy.

While some of the peripheral bond markets had been quite strong earlier in 2012, some nervousness has returned, this time focused mainly on Spain and the impact of austerity measures on the economy and banks exposure to real estate. Irish spreads over Germany have been pretty stable of late, although we would continue to be cautious regarding the extremely positive consensus regarding Ireland among bond investors. The Greek default had no immediate impact on sentiment and the view – which may be optimistic – is that the default has little, if any, knock-on implications for the rest of the eurozone. The generally disinflationary backdrop in the global economy suggests that long-term interest rates in the US, Japan, UK and Germany are likely to stay very low for a further considerable period of time.

Global equities in euro terms have risen by a very healthy 7.7% so far this year, although the recent market action has been softer. Valuations are reasonable but the markets’ strength was due to better macroeconomic sentiment, rather than valuations or earnings. Investors have become a little cautious in the past three weeks or so. This has been driven by more even-handed economic data (rather than the earlier positive data bias) and the return of some nervousness regarding the sovereign/bank nexus in the eurozone. It had been expected volatility to return at some stage and this remains the case.

Currencies

The euro fell late in the week against most of its major counterparts, as speculation mounted that the ECB won’t restart its government bond purchase program, even as Spanish bond yields climbed. The €/$ rate ending the week close to 1.31, relatively unchanged overall.

Oil & gold

Crude oil traded lower for the fifth-successive week as China’s growth rate cooled and Saudi Arabia’s oil minister said the kingdom is determined to see lower prices. The oil price ended the week at almost $103 a barrel, a marginal decline of 0.5% on the week. Elsewhere, gold gained 1.6% as investors looked for safer assets, ending the week at $1,666 an ounce.

Bonds

Spanish bond prices fell once again last week on concern that budget cuts and ECB measures are failing to stem the country’s sovereign debt crisis. Its 10-year yield rose to 6% over the week. German yields fell as investors moved to the safe-haven asset as a result of weaker than expected economic data in the eurozone and a slowing of China’s economic growth. The Merrill Lynch over 5 year government bond index ended the week marginally higher.

About

Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

Stocks Falter Again

Stocks sagged again last week in the face of renewed concerns about the European debt crisis and indications that the US Federal Reserve would be less likely to engage in additional quantitative easing measures. For the week, the Dow Jones Industrial Average dropped 1.2% to 13,060, the S&P 500 Index declined 0.7% to 1,398 and the Nasdaq Composite fell 0.4% to 3,080.

US Jobs Growth Slows

Friday saw the release of a disappointing US labour market report for March. The data showed that payrolls grew by a less-than-expected 120,000, although the unemployment rate did fall to 8.2%, its lowest level in over three years. Markets were closed on Friday, so the report could have some negative spill over effect into the current week. The tepid pace of jobs growth in March is likely a reflection of the unseasonably warm winter weather that may have accelerated payrolls expansion in January and February. In any case, however, it does serve as a reminder that the United States is not about to transform into any sort of robust growth engine, particularly at a time when growth in most of the world is slowing. The view continues to be that growth in the United States should come in somewhere around the 2% to 2.5% level in 2012.

At the Forefront of a Correction?

For a couple of months now, there have been suggestions that the strong advance in equity prices that occurred from last fall through mid-March may mean that markets were overdue for some sort of correction or consolidation. Market action in recent weeks raises the questions of whether we are now in such a period and, if so, how deep will any pullback be. The current pullback has, so far, been blamed on a combination of rising concern over the European debt crisis, fears over a hard landing in China and the likely absence of additional stimulus coming from the US Fed. None of these developments, however, represent any sort of significant change in economic or market fundamentals and it is believed that for the downturn to gain traction we would need to see some sort of deterioration. So how extensive would any sort of correction be? Putting a specific number on near term market forecasts is always a guessing game, but as a starting point, we can look at market trends over the past couple of years. Since the current bull market began in early 2009, we have seen many short-term corrections of around 5% to 7% that have occurred without any serious worsening of fundamentals, so that range represents a possible starting point for any sort of near-term correction.

In short, it is not believed that fundamental macro conditions have changed enough (or at all) to warrant a downgrade of our view toward equities. Beyond the short-term choppiness, our constructive outlook boils down to the fact that monetary authorities remain accommodative even while leading economic data has improved. Given the current backdrop, it is believed share price turbulence is more likely to reflect the consolidation of prior gains rather than the start of some sort of large downturn.

The Long-Term Outlook Remains Constructive

Over the longer-term, it is believed that markets will be headed higher, but would caution that gains will be harder to come by than they were late last year and early in 2012. It is hard to deny the improvements we have seen in the global macro backdrop over the last several months. Notwithstanding March’s slowdown, improvements in the labour market have suggested that the US economy has appeared to be transitioning to a more sustainable trajectory. Additionally, despite the headlines last week over a troubled Spanish debt auction that renewed concerns over the situation in Europe, policymakers do appear to be moving down the correct path.

Despite these improvements, challenges remain and we do expect to continue to see higher levels of market volatility in the coming months compared to what we saw in the first quarter of this year. The risks to our constructive outlook include a recession in Europe potentially leading to broader financial problems, worse-than expected economic data in China, a retreat in jobs market growth in the United States and a further spike in oil prices.

Currencies

The euro weakened 1.5% versus the dollar over the week, as a result of reduced expectations for further US stimulus, resulting in the €/$ rate ending the week at 1.31.

Oil & gold

Crude oil traded within a choppy range as a result of worries about a possible disruption to Middle East crude oil supplies and the latest disappointing US jobs data. The oil price ended the week marginally lower at just over $102 a barrel. Elsewhere, gold endured a difficult week, ending at $1,645 an ounce, 1% lower.

Bonds

Spanish borrowing costs increased last week, as the latest bond auction proved disappointing with just €2.6 billion of debt being sold versus a target of €3.5 billion. German bunds joined US Treasuries making strong gains over the week, due to their safe-haven status. The German ten-year government bond yield traded as low as 1.74% over the week. The Merrill Lynch over 5 year government bond index ended the period over 1% lower.

Source: FT.com, Aviva Investment Managers, Bloomberg, Blackrock, Zurich Investment Managers

About

Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

Opening the business and financial pages of any Irish newspaper these days is a sure-fire way of raising your blood pressure. All too often the headlines are filled with, waffling politicians, redundancies, business closures, wage cuts, union negotiations, plunging asset values, property repossessions, plus, of course, the four-letter word that those in the know mutter under their breaths: NAMA.

So what does all this bad economic news mean to the man or woman in the street in Ireland?

To understand why things are so bad at the moment, it helps to understand a little of what made things so good before. In very simple terms, the Irish economy rose in the 1990s on the back of a well-educated, highly-skilled workforce, a ready supply of labour, internationally competitive wage levels, and an open economy that actively welcomed inward investment. These qualities made Ireland a very attractive place to do business and multi-nationals seized upon Ireland as the perfect hub for their European operations.

However, by 2000 another industry was taking over as the key driver of the economy: construction and property. The Irish had discovered credit and were using it to snap up houses, apartments, offices, shops and factories at home and abroad. Fast-forward to 2007 and the Irish were amongst the best paid workers in Europe and living standards and house prices were near the top of the international league table. Crucially, however, the cost of running a business in Ireland of any size was sky-rocketing.

The international financial crisis of 2007 choked off credit supply. As that dried up so too did demand for property. Because so much of the State’s tax income was dependent on property-related taxes such as stamp duty and capital gains tax , when that slowed so too did the amount of money available to the State. Very soon the State was spending far more money on essential services and welfare than it was taking in.

Which is when the brakes were applied.

A series of budgets saw the Government attempt to raise its tax take at the same time as cutting spending. The collapse of the property market threatened to undermine the security of the major Irish banks, and the Government established the National Asset Management Agency (NAMA) to manage the banks’ crippled property development loan assets. NAMA will acquire billions worth of the banks’ bad loans in return for the banks buying Government bonds. This is designed to free up the banks to begin lending to Irish businesses again.

Some of what all of this means to the Irish man and woman in the street has already been seen in the form of income levies and welfare benefit cuts as the Government seeks to shore up the tax take and balance the books.

The Government has been careful, however, not to attempt to raise taxes on businesses so that internationally Ireland can compete as a business location. Combined with private sector pay cuts and public sector wage restraint, Ireland should begin to creep back up the international competitiveness tables once more. The hope is that this will eventually lead to greater inward investment, although not, perhaps, at the levels witnessed in the 1990s.

As the Government continues with its efforts to balance the books, it is unlikely that consumer demand for goods, services and property will rise significantly over the next couple of years or so.

All of which means that we can expect another two or three years of relative austerity. Then, with a predicted global economic recovery under way, the hope is that Ireland’s renewed competitiveness and low corporation tax rates should again serve to attract inward investment which will create jobs and get money flowing through the economy once more.

Until that happens, and consumer demand picks up on the back of it, we can expect a period of job insecurity, wage and price deflation or stagnation. On the taxation front it is unlikely that the Government will reverse or ease the income levies and welfare cuts in the foreseeable future.

Such a scenario suggests just one thing: financial prudence for everyone. This means ensuring that loans and debts such as mortgages, credit cards and personal loans continue to be paid off and new borrowing and discretionary spending kept to an absolute minimum.

Interest rates have remained low for the last two years as the European Central Bank looked to stimulate its members’ economies. There is little solid evidence of growing pressure to begin raising rates again – which is good news for Irish mortgage holders.

There is much evidence that people have indeed curtailed their spending and that savings levels have risen over the course of the last two years, possibly in tandem with the fall in mortgage repayments brought about by the interest rate cuts. With less job security it seems that ‘rainy-day’ money is being set aside in increasing amounts.

The downturn in Irish and global stock markets has also affected the value of many Irish people’s investments and pension plans. However, such plans are usually based upon long-term growth and investors can take heart from the continued recovery in the markets from the record lows of January and February 2009.

Your financial adviser can tell you more about how your pension or investment has been affected by the economic situation and if there are any steps you can take to ensure that your financial ambitions are realised. Equally they can help you find the best place for those ‘rainy day’ savings so that while you sit tight waiting for the economic storm to blow over, at least your money is working as hard as it can.

About

Neal Kelly is a Co-Founder and a Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

Markets Rise to Cap an Exceptionally Strong Quarter

Markets moved modestly higher last week, which helped stocks to return one of the strongest first quarters in history. For the week, the Dow Jones Industrial Average climbed 1.0% to 12,212, the S&P 500 Index rose 0.8% to 1,408 and the Nasdaq Composite advanced 0.8% to 3,091. On a year-to-date basis, US stocks (as measured by the S&P 500 Index) rose by an impressive 12%, although it is important to note that the pace of growth slowed noticeably toward the end of the quarter, suggesting that the rally has been weakening.

Economy and Policy Remain Supportive

One of the primary reasons for the recent advance in stock prices, of course, has been that economic data have been surprisingly positive. Additionally, central banks around the world have remained committed to retaining exceptionally accommodative monetary policies. There are certainly some significant downside risks that investors should remain aware of, including rising oil prices that have been exacerbated by escalating geopolitical tensions. Additionally, we have seen some continuing progress regarding the ongoing debt crisis in Europe and while the risks of chaotic defaults seem less today than they were in the middle of 2011, political developments could trigger some setbacks.

In any case, however, the macroeconomic and policy backdrop seems to remain broadly supportive of risk assets. In the United States, the labour market is expected to continue to improve as the year progresses and even the long-beleaguered housing market has been showing increasing signs of life. Recent comments from Fed Chairman Ben Bernanke indicate that the central bank remains concerned about economic risks and the Fed has made it very clear that its desire is to keep interest rates at historic lows for the foreseeable future. At this point, the odds for a new round of quantitative easing (i.e., QE3) remain very low given the positive trend of leading employment and economic indicators.

A Pause in the Market Rally?

The view about the markets is that improvements in the global economic outlook, continued easy financial conditions and slowly improving investor risk appetites are all reasons that stock prices should continue to crawl higher. Markets have, however, paused somewhat in their rally over the last several weeks. To a large extent, this can be attributed to the fact that prices had risen so far so quickly and the markets were overdue for a period of consolidation or correction, but it is also important to emphasize that we will need to see further evidence of economic improvement for gains to continue. It is believed that stocks are headed higher from here and that we have not yet seen the market highs for 2012 yet, but we would caution that the pace of gains is likely to be slower and more uneven than they were during the first quarter.

Currencies

Amid mixed eurozone data releases, the euro gained 0.5% against the dollar over the week, resulting in the €/$ rate ending the week at 1.33.

Oil & gold

Amid a build-up of US inventories, the West Texas oil price eased from elevated levels to end the week at $103 a barrel, 4% lower. Elsewhere, gold traded towards $1,700 an ounce, after Bernanke hinted at more pro-growth measures. However, momentum quickly changed, leaving gold slightly higher at $1,667 an ounce at the end of the week.

Bonds

Bond markets extended their gains last week as the deterioration in risk appetite triggered a flow into safer government bonds. The Merrill Lynch over 5 year government bond index ended the week 0.3% higher. The latest Italian treasury auction to raise €3.8 billion in three,
seven and nine-year debt proved successful, as investors accepted lower yields. Conversely, Spain’s ten-year bond spreads widened last week to almost 5.5%, amid doubts over the new conservative government’s commitment to meet deficit reduction targets and concerns that a global slowdown will hurt Spain’s chances of avoiding a bailout.

Source: Aviva, Zurich Investment Managers, Blackrock, Bloomberg & FT.com

About

Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

Press Release
Thomond Asset Management

Thomond Asset Management are proudly supporting the Shane Geoghegan Trust

LIMERICK, IRELAND―March 29, 2012― Thomond Asset Management today announced that they are proud to support the Shane Geoghegan Trust. John Loftus, Managing Director of Thomond Asset Management stated that “we are delighted to offer our support to the Shane Geoghegan Trust and to be the main sponsors of their Fund raiser on the 7 April”
The event will take place in the Brazen Head and will highlight the best of local musical talent, Hermitage Green/ Johnny Feehan (Horslips). Tickets will be available from the Shane Geoghegan Trust and the Brazen Head.

Mr. Loftus stated, “Thomond Asset Management continues to support a broad base of community initiatives and charities and we feel that the Shane Geoghegan Trust represents an excellent example of a positive programme in the heart of Limerick.

We don’t give much credence to many of the old myths about money. We all know by now that “money doesn’t grow on trees”, nor does it “burn a hole in your pocket”.
But for all that there are many misconceptions about personal finance that could leave you out of pocket if you act on them. Most myths are harmless, but some are potentially dangerous: believe them and you could end up out of pocket. So it’s time for a reality check and here is just a selection to be aware of.

Savings & Investments

I don’t feel any rush to start saving.
It’s never too early to get the savings habit, and the sooner you start, the longer your money has to grow. Deposit rates are historically low right now, between 2-3% being about the best you can expect from a regular savings account. You could expect a bit more on a fixed-term account.

Mind you, inflation is still negative so in truth this is a decent enough return.
A deposit account is a good starting point but as your income improves and key spending dates loom in the future, you should consider starting a more growth-orientated investment, such as a stock market-linked fund or bond. Before choosing you should talk to a broker or investment adviser. Many of those planning to save say they will put money aside when they can afford it, rather than committing to a regular payment into a savings account or investment fund.

My deposit account takes the risk out of saving
If you want to live well over the long term you can’t just keep your money in savings accounts – do so and it will be constantly eroded by inflation and taxes. Sure enough, it’s a good idea to have such an account for rainy day spending events. But only by making your money work harder can you have a hope of securing your financial freedom. Investing through a fund invested in a spread of assets – equities, bonds, property and cash – is advised. There is some risk but without risk there’s no reward!

You can’t lose with Prize Bonds
Everyone loves prize bonds. Not only do you get 12 chances a year to become a millionaire, plus thousands more to win lower amounts, but unlike other forms of gambling you also get to keep your stake, which you can cash in at any time.

In practice, most people hang on to the money for fear of missing out on €1m in the next prize draw. When the money is finally withdrawn, often not until the bondholder has died, it will almost inevitably have been ravaged by inflation.

Blue chip shares are low risk
Generally big companies with history and a solid track record behind them offer investors greater security than smaller, untested ones. But there are no guarantees with equity investing. The value of blue chip shares can fall sharply – you only have to look at the Irish banks spectacular fall from grace.

Insurance

I have free travel insurance through my credit card.

The free travel cover provided on most credit cards is actually “travel accident insurance”, which will usually pay out only if you suffer an accident while travelling to or from your holiday destination, in very limited circumstances. Proper travel insurance policies should cover medical expenses, repatriation costs, personal liability and cancellations. Such comprehensive cover is available free on some premium credit cards, but as they charge annual fees of up to €300, you will be paying for it one way or another.

It’s a toss up whether I buy Income Protection insurance, Specified Serious Illness cover or a Payment Protection policy.

It shouldn’t be. A lot of people confuse the three. There is a big difference, however.
Income Protection products insure your income in the event that you are unable to continue working. Payment-protection policies are designed to cover your repayments on a loan if you suffer from an accident, illness, death or redundancy.

With most Specified Illness policies a capital sum is paid out on diagnosis of a specified medical condition or occurrence of some forms of heart attack, some forms of cancer, renal failure, major organ transplant, stroke etc. The key differences between Income Protection and Specified Illness cover are the qualifying conditions and the way in which they pay out. An Income Protection policy throws a much wider net, covering anything that can keep you of your job for three months or longer. With Specified Illness cover you are only covered for any of the illness specified on the policy. Income Protection policies pay out an ongoing taxable regular income that replaces part of your lost income if you have a long-term illness or disability and you can’t work. Specified Illness cover, on the other hand, is designed to pay out a (tax-free) lump sum in the event of you suffering from a serious illness or if you have to undergo certain types of surgery.

The best insurance cover is the cheapest
Most people pick insurance policies by price alone. Only a few give the policy terms more than a cursory glance before signing up. You may believe that one policy is pretty much the same as another. Not so. They can vary quite considerably, and you normally get what you pay for. A low price can mean you have to pay a large chunk of the claim yourself, either because of a massive excess or because the maximum payout is totally inadequate for your needs. You may have to do without a courtesy car, or alternative accommodation if your home is flooded. You may end up with nothing at all because you have failed to spot the long list of unreasonable exclusions, or have missed an arbitrary deadline. The best way to choose a policy is through personal recommendation or, failing that, by consulting an independent financial adviser who knows his stuff.

I’m too young for life insurance
You may be young, but you’re probably not immortal. As soon as there is someone who depends on you financially, you need life insurance. That may be a partner who you share a mortgage with, a spouse, or children – anyone who would struggle for money as a result of your death. Life assurance comes basically in two forms. The most basic form is called ‘term assurance’. And then there is what is known as ‘whole of life’ cover, which pays out no matter when you die. Term has no investment value but simply pays out a lump sum to your dependents upon your death. The length of the term of the policy can vary but should ideally match the date at which you would expect some major debt commitment to fall due, say your mortgage. In the event of your death your next of kin would have a tidy nest egg to tide them over. This form of life assurance is the cheapest as there is no payout if you survive the term of the policy.

Pensions

I’m too young for a pension.
It’s the classic response young people give. Roughly half of Ireland’s workforce are in pension schemes. The others are happy to pin their faith on the State’s Social Welfare pensions when it comes to retirement. People are living longer and leading more active lives in retirement. As a result it is more important than ever for them to think about where their income will come from when they stop working. The State Contributory Pension will provide a basic income at best. It is currently worth €230.30 a week, for those who qualify. But this will not go much further than meeting the cost of staple household expenses and is not going to be enough to maintain the standard of living you’ve been used to. For this reason, it’s important for people to take control of their retirement planning, which really means making decisions now with regard to pension provision.

Banking/Mortgages

Withdrawing cash from an ATM abroad is free
Most credit and debit cards typically incur a loading fee outside this country.

Consolidating your credit cards and loans onto your mortgage saves money
It can certainly cut your monthly outgoings, and mean that you only have one creditor to deal with, rather than several smaller ones. The interest rate charged on the new combined loan may well be lower than you would have been paying on your previous debts. However, as many consolidation loans tend to be long term, you can end up paying more interest in the long run. Another problem is that the loan will be secured on your property, meaning that you now face the extra risk of losing your home if you can’t keep up with repayments.

Interest-only mortgages make homes more affordable
An increasing number of homebuyers, especially first-timers, opt to pay only the interest on their mortgages and nothing off the capital. The big problem with interest-only mortgages is that they allow you to fool yourself into believing you are buying a home, when you’re really only buying the difference between the purchase price and current value. Any increase will reduce the debt, but will do nothing to strengthen your position on the property ladder. But any fall in value could leave you with negative equity, leaving you with even more to repay.

About

Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

Are Rising Bond Yields a Concern?

Stocks dropped last week, but the focus for investors has been on developments in the bond market. Within equities, the Dow Jones Industrial Average lost 1.2% to 13,080 and the S&P 500 Index declined 0.5% to 1,397, while the Nasdaq Composite managed to post a 0.4% gain to 3,067.

The yield on the benchmark 10-year US Treasury had been trading at around the 2.0% level for a period of several months before moving sharply higher in recent weeks. The yield rose to above 2.35% last week before settling at around 2.25% by the end of the week (bond prices move inversely to yields). The selling off in bonds has caused some to wonder whether we are at the forefront of a bond bear market. Additionally, it raises questions about what these yield movements mean for the stock market.

First, we should not be surprised to see additional upward moves in yields, at least in the short term. Economic news has been relatively good over the past few months and as long as that trend continues, yields should retain an upward bias. This is not to say, however, that a bond bear market is upon us. Typically, bond bear markets happen during periods of interest rate policy tightening. While the Federal Reserve has indicated that economic trends have been improving, there is almost no evidence to suggest that the United States is entering into an inflationary environment, and the central bank has maintained its forward guidance that short- term interest rates are set to remain low for some time.

Additionally, it is not believed that higher bond yields by themselves will act as an impediment to the stock market. While it is true that any sharp and sudden moves in yields have the potential to unnerve investors, such effects are likely to be temporary. Over the longer term, modestly higher yields should be a source of concern for stocks, especially since the rise in yields is coming as a result of improved economic conditions.

US Economic Trends Remain Market Friendly

So what are some of the improved economic conditions that have been pushing yields higher? We have devoted quite a bit of space in recent weeks to discussing the improvements in the US labour market, and while jobs growth is certainly among the most important economic indicators, there are other factors that have been showing signs of improvement as well Debt deleveraging remains a source of concern, but we have been seeing progress on that front. Individuals have been paying down their debt over the past few years and household debt levels have been falling noticeably. Similarly, the US housing market has long been a significant source of weakness, but that sector of the economy does appear to be in the midst of a long-term bottoming process and may be entering into some sort of recovery.

An additional issue on the minds of many investors is the US fiscal situation. The end of this year marks several important deadlines, including the scheduled expiration of the Bush-era tax cuts and temporary incentive measures as well as the beginning of scheduled spending cuts. Forecasting exactly what will happen on the fiscal front is complicated due to this November’s elections, but our guess is that there is probably that some sort of tax compromise is enacted either later this year or early next year.

Looking Past Downside Market Risks

There are a number of angles that could be taken if one wanted to emphasize potential downside market risks. In addition to concerns over rising yields, we could point to economic and debt problems in Europe, concerns over growth in China, relatively modest levels of global economic growth, weakening trends in corporate profits and escalating geopolitical tension in the Middle East.

While all of these concerns are real, we would argue that the current strong run for equities has mostly been a result of macro risks receding. As long as fundamentals are at least decent, that should be good enough for risk assets. We never believed that solid market performance would require a significant turnaround in global economic growth conditions and a continued environment of modestly positive fundamentals should remain a market-friendly one.

Stocks still remain attractively valued and the market is still discounting a more negative environment than what we expect. Corporations remain flush with cash and are poised to engage in a number of shareholder-friendly activities. From an individual investor perspective, a large number of people are still underweight stocks. As such, we believe we have not yet seen the end of the market’s upward moves.

Currencies

Despite eurozone debt worries resurfacing, the euro gained almost 1% against the dollar, resulting in the €/$ rate ending the week just below 1.33.

Oil & gold

The West Texas oil price traded within a choppy range last week, on the back of disappointing economic data releases. Overall, though, crude oil ended the week slightly lower at just under $107 a barrel. Gold touched a two-month low below $1,630 before recovering to end the week slightly higher.

Bonds

Bond markets recovered from the large falls of the previous week as deterioration in risk appetite triggered a flow into safer government bonds. US, German and UK government bonds rallied sharply while, in contrast, peripheral countries endured higher debt yields. In particular, Spanish ten-year bond yields traded close to 5.5%. The Merrill Lynch over 5 year government bond index ended the week 0.2% higher.

Source: FT.com, Blackrock, Zurich Investment Managers, Aviva

About

Neal Kelly is a Co-Founder and a Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional

Stocks Rise to New Cyclical Highs

Equity markets around the world continued to advance last week, again thanks to continued improvements in economic growth and an overall sense that macro risks have been receding. In the United States, stocks rose to new post-credit-crisis highs, with the Dow Jones Industrial Average advancing 2.4% to 13,232, the S&P 500 Index rising 2.4% to 1,404 and the Nasdaq Composite gaining 2.2% to end the week at 3,055. At the same time, bond prices sank as yields moved sharply higher, with the yield on the 10-year Treasury jumping to close to 2.3% after trading at around 2.0% for several months. Meanwhile, oil and petrol prices rose again, gold prices fell and the US dollar gained some strength.

Economic Growth Shouldn’t Be Derailed by Higher Oil Prices

As we have been saying for the past several weeks, it appears the US economy is improving to the point that it is entering a self-sustaining cycle, helped in large part by advances in the labour market. There have been improvements in US retail sales (with January’s figures up by 1.1%) and we should expect that gains in employment will translate into faster income appreciation and additional consumption. One cautionary note is that jobless claims have stopped falling in recent weeks, which suggests that the future pace of jobs growth may be more subdued than we have seen in the past few months. It is possible that the warm winter weather may have skewed jobs growth to the upside.
At the beginning of the year, two of the main risks to global economic growth appeared to be the ongoing European credit crisis and the possibility of a hard landing in China. While those risks seem to have receded since that point, a new one has emerged: rising oil prices. Since December, oil prices have advanced by roughly $20 per barrel. Our assessment is that roughly half of that comes from growing optimism about the prospects for global growth as well as some supply shortfalls. The other half can be attributed to the risk premium coming from noise in the Middle East and concerns about Iran. Quantifying the exact impact of the “Iran premium” is extremely difficult since there is a near-limitless range of possible developments that could impact oil prices. The worst-case scenario would be for some sort of military conflict that could disrupt the flow of oil through the Straits of Hormuz, but at this point that seems unlikely. In any case, it is important to remember that the current run up in oil prices is still only about half of what occurred around this point last year, and at present it is not believed oil prices have risen to the point that they represent a significant threat to the pace of global growth.

US Treasury Yields Rise: What Does It Mean for Stocks?

An additional development that drew attention last week was the dramatic rise in US Treasury yields. The rise in yields came at the same time that the Federal Reserve held its regular interest rate policy meeting. At that meeting, the Fed confirmed that economic growth is clearly not weakening and may be strengthening, and the central bankers retained their commitment to keeping rates low for the foreseeable future. At this point, markets appear to be signaling that an additional round of quantitative easing is not in the cards, which (along with improved growth) helps explain the advance in yields. The selloff in bonds does raise the question of how much further it can go before higher yields represent a threat to equity markets. In our view, current macro conditions warrant additional increases in yields. It is important to remember that before last week, we saw several months of improved economic data without a corresponding rise in yields,
so in many respects, last week’s moves represent a sort of “catch-up” effect for the bond market. The current trend of rising yields signals an acknowledgement of growing optimism around the economy and, as such, is a positive for stocks.

Stocks Likely to Grind Higher From Here

While it is important to remain cognizant of the risks facing the markets, the overall view
toward stocks remains constructive. Since the current rally began last autumn, we have seen some market pullbacks, but they have been brief and shallow, likely because many investors remain underweight equities and have been using pullbacks to buy on price dips. Now that bond prices are falling, we believe investors as a whole will finally begin to move out of bonds and into stocks. As such, as long as the macro fundamentals remain reasonably good, we believe equities should grind higher from here.

Currencies

The dollar weakened against most major currencies after lower-than-expected US inflation data fuelled speculation that the Federal Reserve will maintain economic stimulus. This resulted in the €/$ rate ending the week just below 1.32.

Oil

Oil prices rose late in the week on the back of the upbeat US economic data, which pointed to increased fuel demand in the world’s biggest economy. Overall, though, crude oil ended the week unchanged at $107 a barrel.

Bonds

German bund prices fell last week, leading to the biggest weekly rise in yields since last November, after the Fed raised its assessment of the US economy. Elsewhere, Italian and Spanish borrowing costs fell following successful bond auctions. The Merrill Lynch over 5 year government bond index ended the week 1.2% lower.

Source: FT.com, Bloomberg, Aviva, Blackrock, Zurich Investment Managers

About

Neal Kelly is a Co-Founder and a Director of Thomond Asset Management and can be contacted @ neal@thomondam.com

Warnings:
1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up.
3. Benefits may be affected by changes in currency exchange rates.
4. Past performance is not a reliable guide to future performance.
This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional