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Members of the St. James‟s Place Wealth Management Group are authorised and regulated by the Financial Services Authority.  The St. James‟s Place Partnership and the title „Partner‟ are the marketing terms used to describe St. James‟s Place representatives.

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M a r k e t B u l l e t i nMONDAY 20 JUNE 2011

Tel: 01437 766396Website: www.burchwealthmanagement.co.uk  

_This weekly Briefing Note aims to pick out some of thekey financial and economic issues touched on in the pressover recent days, and from time to time includes the viewsof some of our independent fund managers.

On a Slippery Slope

A week on and nothing much seemed to have changed forinvestors  –   Greece‟s woes still remained uppermost in

 people‟s minds, exacerbated by nagging doubts over thestrength of the global recovery. So it was no surprise thatfinancial markets remained volatile as traders watchedtheir screens avidly for news from Reuters or data fromBloomberg, indeed anything that would help them decidewhether to sell or buy. But the week ended pretty much asit started, with the Greek sovereign debt crisis lurchingonwards as the country‟s politicians endeavoured topersuade its people that more pain was the only

alternative. At the beginning of the week, billionaireinvestor George Soros criticised international authoritiesfor “not providing a solution” for the eurozone debt crisis,adding that European finance ministers were basicallybuying time rather than tackling the problems. Whilst  policymakers might have vacillated, the markets didn‟tand traders very quickly marked down the price of benchmark ten-year Greek bonds, thus in turn pushing upyields to a record 18% as they priced in the likelihood of Greece defaulting on its commitments. Unsurprisingly,the cost of insuring Greek debt also exploded upwards.

The word „default‟ is non-PC amongst eurozonepolicymakers – particularly in France and Germany – whoprefer to talk about „re-profiling‟. Should Greece renegeon its debt then the biggest losers would be French andGerman banks who between them own some 75% or so  –  around   €77bn –   of the ailing country‟s debt. UK banksrank third but, fortunately, are a long way behind inmonetary terms, owning some €11bn. The Sunday

Telegraph reported that UK banks have pulled billions of pounds of funding from the eurozone in recent months,reflecting increased concerns about a „Lehman-style‟ event connected to a Greek default. As the week progressed, the pressure built; and at one point Greece‟s

Prime Minister, George Papandreou, offered to resignafter he lost more political support for further austerity

measures being demanded by the EU and IMF in return forthe next tranche of bailout funds. In the streets of Athensthere was anger and despair that finally turned to rioting butwhich did have the positive effect of 

galvanising Nicholas Sarkozy and Angela Merkel into

agreeing to meet the next day to try to break the stand-off.Equity markets bore the brunt of short-term selling asinvestors scurried for the safety of US and Germangovernment bonds.

The pressure on European finance ministers to find asolution became an even greater imperative as fears of contagion from political and market turmoil in Greece sentSpanish borrowing costs to 11-year highs. Meanwhile, onthe sidelines, Nout Wellink, the Dutch central bank governor, said Euro pe‟s emergency bailout funds should bedoubled (to €1,500bn) in size to convince financial markets

of governments‟ commitment to defending the euro. Such„shock and awe‟ tactics were used twice by the USgovernment during the banking crisis, which eventuallybrought stability to the markets. One of the major sticking  points to a solution was Germany‟s demand that existingprivate bondholders bear some of the cost of the secondbailout; however, by Friday, Germany had backed down,throwing its weight behind a voluntary rollover of Greek debt, rather than a full scale debt exchange with extendedmaturities (which would mean losses for bondholders).

Kicking the Can

The news came in time to give investors a much-neededfillip, enabling equity markets to rally after several days of falls. Finance ministers and ECB officials met over theweekend and were expected to give the all-clear for Greeceto receive €12bn of emergency loans that would see thecrisis-hit country through to September and buy time for theauthorities to agree the details of a second bailout. The

Sunday Times was not so sure, though, saying the future of the eurozone was still in the balance with Greece asking formore time to implement the latest round of savage cutsdemanded by the IMF/EU/ECB troika and as the batteredcountry suffered from further waves of social unrest.

However, the news today is that Eurozone finance ministershave postponed their decision on a €12bn loan to Greece

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Members of the St. James‟s Place Wealth Management Group are authorised and regulated by the Financial Services Authority.  The St. James‟s Place Partnership and the title „Partner‟ are the marketing terms used to describe St. James‟s Place representatives.

St. James‟s Place UK plc: Registered Office: St. James‟s Place House, 1 Tetbury Road, Cirencester, GL7 1FP Registered in England Number 262806

until it introduces further austerity measures. Accordingto the BBC, the ministers said they expected to pay thelatest tranche of a €110bn EU and IMF aid package bymid-July, but that it will depend on the Greek parliament  passing €28bn of new spending cuts and economicreforms.The ministers also committed to put together a secondbailout package to keep the country afloat. Jean-ClaudeJuncker, Luxembourg‟s Prime Minister, who chairs the

meetings of the 17 eurozone finance ministers, said that aslong as the Greek parliament supported the new measures,he was certain Greece would get a second bailout. TheGreek government expects a second rescue package to besimilar in size to the first one ( €110bn) but Athens hassaid it needs the €12bn from the existing package by Julyto avoid defaulting on its debt. Belgian Finance MinisterDidier Reynders said the release of that would depend onthe Greek Prime Minister George Papandreou surviving aconfidence vote on Tuesday. “To move to the payment of the next tranche, we need to be sure that the Greek parliament will approve the confidence vote and supportthe programme, so the decision will be taken at the start

of the month of July,” he said.

Less Sparkle

The other thorny issue that is causing investors to fret isthe direction, or rather the strength, of the globaleconomic recovery going forward. In recent weeks theflow of economic data has been mixed and somewhatinconclusive: on the one hand, the developing economiesare still growing fast; but conversely, the developed worldis for the most part (excluding Germany) struggling. Onething investors like is certainty but at this point in the

economic cycle clarity is lacking, adding to volatility inthe markets. Firstly, the US is clearly slowing  – growingat a more sedentary pace than it was, with economistsexpecting it to grow at 1.3% in the second quarter, downfrom 2.2% in the first three months. Higher inflationbecause of rising commodity prices, particularly oil, ishurting the American consumer who in turn feels lessconfident; the Thomson Reuters/University of Michiganconsumer sentiment index has fallen so far this month,compared with May. This drop in confidence is beginningto impact on consumer spending  –  shops in the US sawsales fall for the first time in eleven months in May,

particularly for car dealers.

But whilst the US is the world‟s largest economy, the 44countries that make up the developing world account, inaggregate, for almost half of global growth and they, forthe most part, are doing well. The four heavyweights arethe BRIC economies, Brazil, Russia, India and China andthey continue to expand. According to a report from theIMF, global growth will be 4.3% this year and 4.5% nextyear and, although China and India may be slowing, theywill still see GDP rise by 8.2% and 9.6% respectively  –  both down from around 10% but still very respectable.This point was made by economist David Smith, writing

in The Sunday Times, who said that, whilst the globaleconomy is slowing, the fears are probably overdone. He

  pointed to temporary blips such as the effect of Japan‟s

earthquake on its own and the rest of the world‟s supplychains. However, with the BRIC countries all having raisedinterest rates this year  –  mostly in response to inflationremaining stubbornly above targets  –  investors are worriedthat this may dampen demand too much. Surprisingly, oneof the worst-performing stock markets this year, afterGreece, is Hong Kong, where it seems that even there therich are feeling less so, following the disappointing stock 

market flotation last week of luxury fashion house Prada.The company managed to raise only 80% of the expected$2.6bn.

Steady as She Goes

Whilst the US and BRIC economies may be flagging a little,the economic recovery in the UK is expected to remain ontrack over the coming months in the face of a deterioratingoutlook for most of the eurozone. According to the closelywatched leading indicators index compiled by theOrganisation for Economic Co-operation and Development(OECD), Britain and Germany are on course for a stable

pace of expansion, with the indicators for the UK steady at101.6 in April (with anything over 100 indicating growth).Economist Howard Archer at IHS Global Insight said, “TheOECD indicator for the UK suggests the UK is headed formodest economic expansion over the coming months,” withhis own forecast being 1.4% for this year. Last week, figuresfrom the Office for National Statistics showed that thenumber of unemployed fell by its largest margin in morethan a decade, although the number of jobless rose to almost1.5m, reflecting changes in the way those on benefits arecalculated. Whilst a larger working population is welcome,one of the obstacles looking ahead is apparently a shortfall

in skills which is leaving employers – 3 out of 4 – strugglingto fill their vacancies.

Markets Resolute

Against the backdrop of concerns about the eurozone andthe pace of global growth, stock markets have for the mostpart been remarkably resilient – even at the end of last week there were few major upsets. The UK slipped around fiftypoints yet Wall Street rose by the same, whilst Paris andFrankfurt were up but the Nikkei was down. Looking back at the last six months there has been no shortage of „events‟

 –  the Arab Spring, the Japanese earthquake, inflation,slowing global growth and the eurozone sovereign debtcrisis  –  which might have spooked investors. But, asFidelity fund manager Tom Stevenson pointed out in The

Sunday Telegraph, looking at a chart of the FTSE All-Share and allowing for the March blip, you would think thatnothing of import had happened at all. Year to date the UKis down 2% but the S&P 500 has risen by the same marginas both markets trade sideways, reflecting investors‟assessment of events. Going forward he thought thatprobably one of the best strategies for investors is to focuson the high-growth parts of the world or the most defensiveparts of the slower-growth countries and to be as diversified

as possible by asset class and geography.