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Pre-election market fever, it’s all Greek to me…

As 6 May draws closer, it is almost impossible to miss the salacious General Election press coverage.  Popular topics include the ever changing opinion polls and subsequent possibility of a hung parliament.  From an investment perspective, the focus is trained on the elected government’s likely impact on the economy.   Proposed action as to how each party will tackle the national budget deficit is a dominant talking point, amid the general speculation surrounding the anticipated changes depending on who is in charge after the election.

Despite election stories hogging the limelight, this week’s news that ratings agency Standard & Poor's (S&P) had cut the credit rating for three euro zone member states grabbed the headlines.  First came the announcement that Portugal had been cut two grades to A-, amid concerns about its public finances.  Minutes later Greece's credit rating was slashed right down to junk (BB+) level, the first time such a fate has befallen a Eurozone country.  A day later Spain was downgraded from AA+ to AA. 

The downgrading of a country's credit rating means that the ratings agency deems it to be a riskier place to invest and consequently increases the interest rate investors will charge the county’s government for loans.

S&P said its decision to cut Greece’s rating was based on its latest assessment of the political, economic and budgetary challenges that the Greek government faces, suggesting that its weak long-term growth prospects make it less credit-worthy.

The euro and global markets tumbled on the back of the downgrade announcements, as concerned investors feared that the loss of confidence in Greece might spread to other weak Eurozone economies and could ultimately derail the economic recovery.  The FTSE 100 fell 4.4% (257points) between Monday 26 April and Wednesday 28 April, wiping out most of the gains it had achieved since mid-March.

Whilst the UK has, so far, maintained its AAA rating, unless the government takes drastic action to cut borrowing, concern is growing that Britain could be heading towards the same fate as Greece, Portugal and Spain.  The Institute for Fiscal Studies has stated that the political parties' plans for addressing this key issue are thin on detail.   

Whatever the election outcome and even if jittery market conditions persist in the short term, there will still be investment opportunities in the coming months, it is simply a case of finding them. 

Take advantage of market jitters

The speculation surrounding: a potentially inconclusive general election result; the impact of measures to address the UK’s record debt and fear that the UK could be heading towards the same fate as Greece, Portugal and Spain; have contributed to recent spikes in market volatility.

To take advantage of this volatility, you could consider using covered warrants. These flexible trading instruments can enable you to profit from: both falling markets and any subsequent recovery; as well as hedge your existing investments. Covered warrants will be held until expiry unless you sell them during their life. The maximum loss is limited to the initial investment.

From 4 May to 11 June 2010, you can trade covered warrants issued by The Royal Bank of Scotland (RBS) through a Barclays Stockbrokers account for just £1.  This means you can save up to £11.95 on each online trade that you place in these instruments.  View the terms and conditions of this offer.

Before trading you should fully understand the nature of covered warrants and the extent of their exposure to risk, indicating your understanding. You should familiarise yourself fully with the instrument you intend to trade by visiting the issuer’s website before trading. If this is the first time you have traded in covered warrants you will be asked to complete an online appropriateness assessment.

Find out more about covered warrants

Support service investment opportunities?

The key economic objective for the new government has to be a focus on reducing Britain’s record-breaking budget deficit.   A popular pre-election theme is the need to cut public sector costs and one way to do this is through outsourcing some back-office functions.

Outsourcing is an attractive option for a government looking to cut costs, as outsourcers strive to maintain or improve service levels.  Their other key advantage is that they can provide these services at a lower cost than if such functions were kept in-house.  This means that companies that provide outsourcing have the potential to be in demand post election and hence could be an investment opportunity to consider.

Such companies can be found in the ‘Support Services’ sector of the FTSE and include names such as Serco (SRP) and Mitie (MTO).

Healthcare investment opportunities?

With an ageing population, the NHS and long-term care remain hot topics for the political parties striving for an election victory.   When the US evaluated its health reforms, the result was the government taking a greater role in healthcare funding. 

Improving the current structure in the UK will be tough for a government that needs to cut costs.  Part of the solution is likely to be a growing reliance on the private sector to ease the growing burden of government NHS funding.

This is good news for Healthcare companies including pharmaceutical and medical device suppliers – companies such as GlaxoSmithKline (GSK) and Shire (SHP) and others in the ‘Pharmaceuticals and Biotechnology’ sector could be further investment opportunities to consider.

Enhanced returns from the UK markets

Whilst we have seen increased market volatility as investors digest news surrounding the election build-up and the credit rating downgrades of Greece, Portugal and Spain, recent figures have shown that the UK economy is still on the gradual road to recovery. 

If you believe the UK is in recovery and are seeking investment opportunities to capitalise on this then you may wish to consider our latest Structured Product.  Our 3-Year FTSE 100 Supertracker Issue 2 offers you the opportunity to achieve enhanced returns from the UK markets over the next few years whilst having some level of security on the downside.  Though, with this investment, you might get back less than you invested.

 
Find out more about our 3-Year FTSE 100 Supertracker Issue 2

Remember, Barclays Stockbrokers does not give advice.  If you are in any doubt as to the suitability of investments mentioned in this Investment ViewPoint, please seek professional financial advice.

Volatility – the VIX factor

The VIX is an index that measures the price of implied volatility of 30-day S&P 500 index options. It is commonly known as the ‘fear index’ - the higher the index, the more volatility is generally anticipated in the market or, put another way, the greater the level of fear! The VIX is measured in percentage points, so for example, if the VIX is trading at 25 that equates to an implied volatility rate of 25% for 30-day S&P 500 options. 

             
The chart below takes a look at the VIX over the last 5 years and perhaps illustrates why it is sometimes referred to as the ‘fear index’.  Markets in general thrive on certainty.  Where there is uncertainty there is generally volatility and where there is volatility, risk and fear come to the fore.  Looking more closely at the chart you can see the VIX spiked to around 80 at the height of the global economic crisis and the Lehman Brothers collapse in September 2008.  Since then global markets have largely calmed as governments introduced fiscal stimulus packages through quantitative easing and helped to restore liquidity and confidence to the system.  As ‘normal’ conditions returned so the VIX measurement has gradually subsided.

If you look at the chart up to the end of 2007, and prior to the onset of the credit crunch and global economic crisis, the VIX generally traded within a range of 10-20 so today’s figure of around 16 indicates that we are largely back to pre-crisis levels. So are markets back to normal? Or is there still a bumpy road ahead of us? Of course we can not tell what the future will bring but what we do know is that markets move in cycles.  So the question remains, when will volatility return? Here in the UK, markets continue to wait with bated breath on the outcome of the May 6 general election and the potentially damaging scenario of a hung parliament.  With no clear winner and therefore no clear mandate for a government to drive the strategy to tackle the UK’s budget deficit, this could bring further unwanted uncertainty for markets and therefore potentially further volatility.

Emotion can be an important part of any client’s trading strategy.  Knowing when to take a profit or cut your losses is often the hardest decision to make and quite often the ‘heart rules the head’.  The recent economic downturn is testament to this as clients and markets alike lick their metaphorical wounds.  Gulnur Muradoglu, Professor of Finance at Cass Business School, who specialises in behavioural finance, says “For asset prices, investors used past data to calculate the probability of positive, negative and extreme returns.  The financial crisis has changed all that.  Now ambiguity prevails rather than risk.  Ambiguity is more difficult to deal with – it makes people freeze.”  Utilising a range of indicators can often help investors reach the correct investment decision.  Following the performance of the VIX is just one potentially helpful indicator.  There are of course a number of steps that clients can use to manage their ‘fear’ of the unknown and help control their own trading destiny.  For example using different order types such as take profit and stop loss orders or accessing complimentary market research on the BARXdirect suite of platforms can be considered helpful options to execute your trading strategy.   

You can position your portfolio in a number of ways to take advantage of any return to volatility.  If you are an experienced investor, and prepared to accept a high degree of risk of losses to your capital in exchange for the possibility of high returns, then the BARXdirect suite of trading platforms offer an attractive range of markets to choose from. 

On BARXdirect: Equities you can trade UK equities and Covered Warrants allowing you a range of options to diversify your investment portfolio.  On our BARXdirect: CFD and Financial Spread Trading platform you can take leveraged positions, both long and short, in a number of markets and underlying instruments including, equities, sectors, indices, FX and commodities such as oil and gold.  Finally on our BARXdirect: FX platform clients enjoy some of the tightest spreads in the market at 0.9 pips on EUR/USD and 1.8 on GBP/USD.  Did you know approximately $3 trillion is traded daily in global FX markets and is the largest and fastest moving markets in the world?  To experience the real thing you can open a demo account with £50,000 virtual money or alternatively open a live FX account

Leveraged foreign exchange trading carries a high level of risk to your capital and you should only deal with money you can afford to lose.