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What's the score at home and away?

In the aftermath of the UK general election and the Greek sovereign debt crisis, volatility in both the UK and European markets has continued apace in recent weeks.  In this week’s Investment ViewPoint comment, we look at some of the activity driving market sentiment, both at home and away.

What is happening at home?

Public spending cuts

As we await the emergency budget on 22 June, our new Chancellor, George Osborne has made clear that unless the UK tackles its huge public debt, the economic recovery could be derailed. Other countries with large deficits, including France and the USA have already taken action to make savings this year, in order to restore confidence and sustain economic recovery.

Osborne has announced plans to cut government spending this financial year and these savings will to be used to reduce the budget deficit from where it currently stands, at an unprecedented £156 billion. 

An independent Office for Budget Responsibility (OBR) has been established on an interim basis, to make an assessment of the state of the public finances and the economy ahead of the emergency budget.  It will also launch a report on “skeletons in the closet”, examining every spending decision taken since 1 January this year, to ensure that they are consistent with the Government’s priorities and good value for money.

A change to the tax system?

The UK Government’s: “Programme for Government” document, released this week, suggests that the emergency budget will reveal changes to our tax system.  Capital Gains Tax (CGT) limits look set to be revised, though the timing and nature of such changes are yet to be specified.

Rumours suggest that we might see a decrease in the annual allowance for CGT; though perhaps more likely is a change in policy to bring Capital Gains rates in line with Income Tax rates.

We shall discover the detail behind this on 22 June, but in the meantime, it is wise to be prepared and organise your investments to maximise tax efficiency. You still have time to act and ensure you are making the most of our and tax shelters, so you can avoid paying unnecessary tax on your investments.

With the FTSE 100 closing below the key psychological level of 5000 on 25 May, some market commentators have suggested that stocks are looking cheap and that there is value in the UK market.  If you share this view, you could consider an Exchange Traded Fund (ETF) that tracks the UK market such as the iShares FTSE 100 or iShares FTSE 250.

Bear in mind that the value of ETFs can fall as well as rise and you may receive back less than you invested.

Continuing fears of European contagion
European markets continue to react to the slew of Eurozone news, which is largely centred on the introduction of austerity measures to tackle burgeoning budget deficits.  Concern is mounting that the fiscal tightening will impact the already weakened Euro, amid worries that that budget deficits could cause the weaker Euro zone countries to default.  The very real risk of a double dip recession remains, which would further damage public finances across the whole Euro zone.

What is the latest for key Euro zone members?

• Greece – has started drawing on its €80 billion bail-out fund and made a start on tackling its domestic issues, announcing tough action on matters such as tax evasion.  This has triggered a wave of public sector strikes and violence on the streets of Athens
• Spain – the government won backing for its austerity programme by a single vote, as it bids to address its budget deficit and restore market confidence.  The rescue of Spanish bank, CajaSur, by the Spanish central bank raised concerns as such a rescue has only happened once before.  Further market jitters were sparked by the announcement that four Spanish savings banks had plans to merge
  
  
• Italy - budget cuts of up to €24 billion over the next two years were approved
  
  
• Germany – propose to extend their recently introduced short selling ban to cover all stocks and Euro currency derivatives not intended for hedging.

It is not all bad news; whilst the relentless news flows have had a negative impact on market sentiment, this does not rule out investment opportunities.  Many believe the bad news has left European share prices undervalued, resulting in their share prices trading at significantly lower levels than comparable businesses in other parts of the world. 

If you agree with this view, there are a number of ways you can gain exposure to the wider European market, such as investing in a European focussed fund.  Use our to search for funds in the “Europe excluding UK” sector, such as Neptune European Opportunities, Blackrock European Dynamic or Standard Life European Equity Growth.

You should bear in mind that fund performance is not guaranteed, funds should be considered as mid-to-long term investments, their values can fall as well as rise and you may receive back less than you invested.

As the mists start to clear

Almost one full week after the UK election, the picture starts to clear and David Cameron has been appointed the new Prime Minister of the UK. He takes over “a political system in need of reform” and has stated his intention to form “a full coalition” between his Conservative party and the Liberal Democrats, led by Nick Clegg who will now assume the role of Deputy Prime Minister. Volatility continues and first thing this morning the FTSE-100 initially opened 40 points lower, but recovered quickly suggesting that markets realise the hard work starts now in tackling the UK’s economic and political problems.  In this Investment ViewPoint, we continue our analysis of the market’s reaction to the developments in Westminster.

Leading up to the election, we saw the FTSE-100 fall from a high of 5,553 on Friday 30 April to hit a post-election low of 5,073 on results day, Friday 7 May before closing the week at around the 5,123 mark, losing 2.6% in Friday’s trading session alone – the worst weekly performance in 18 months.  By the time markets closed on Monday afternoon the FTSE-100 had recovered more than 5% as markets digested the rescue package agreed by the European Union over the course of the weekend.  Tuesday then saw the FTSE give up some of these gains, closing down 53 points at 5,334.  It really has been a roller-coaster ride this week for the UK’s main equity index!

If you are looking to achieve enhanced returns from the UK markets over the next few years, then you may wish to consider our latest Structured Product.  Our 3 Year FTSE 100 Supertracker Issue 2 offers the opportunity to achieve enhanced returns from the UK markets over the next three years albeit that your capital is at risk; you could get back less then you invested even if you hold it until the end of its term.

But you will need to hurry – this issue is only available until midday on Friday 14 May.

Similarly, if you are looking for an investment opportunity but feel nervous about the current market conditions, perhaps now is the time to add the expert services of a professional fund manager to your portfolio.  Barclays Stockbrokers’ Funds Market gives you the chance to find your perfect investment partner, offering a wide range of funds managed by some of the top managers in the business, and a host of tools and research to help inform your investment decisions. The value of funds can fall as well as rise and they should be seen as a medium to long term investment.

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.

Friday 7 May and the long awaited general election is finally over.  No more live television debates or endless campaigning by the respective Party leaders. And while the final votes are still being counted, the UK faces up to the prospect of the first hung parliament since 1974. 

“So is a hung parliament really bad news for the UK economy?”  “How will this result impact markets and what do the wider global economic events mean for my portfolio and current investment strategy?”  These are the key questions being asked by our clients and in our first post-election ViewPoint, we discuss these, taking a snapshot view of last nights result while also reviewing significant activity in the global bond, equity, currency and commodity markets.

The global economic landscape

It is too early to tell what impact, if any, a hung parliament will have on the UK economy.  Markets have a habit of pricing in anticipated news and a hung parliament has been the expected outcome by most commentators for a while.   However the UK election is only one of a number of factors influencing global markets and trading by clients at Barclays Stockbrokers.  Yesterday’s historic fall in the US coupled with continued unrest in the Euro zone and companies striking black gold in the Falklands Islands have grabbed the economic headlines, overshadowing the election impact from a market perspective and driving a number of trading trends on Barclays Stockbrokers platforms. 

Firstly taking a look at the UK,  government bonds dropped and sterling fell this morning as exit polls and results in all point towards a hung parliament with the Conservatives the largest party.  Generally speaking a hung parliament is not good news as it maintains the uncertainty stalking UK financial markets.  With no clear winner and therefore no clear mandate for a government to drive the strategy to tackle the budget deficit it potentially leaves the UK market open to further volatility.  That said, some commentators, including our own Barclays Wealth analysts do not think that a hung parliament would necessarily stifle fiscal decision making, so uncertainty remains.  This morning the FTSE 100 was down 63 points at 5198.7 on yesterdays opening with shares also taking a tumble.  However market dips such as this can create opportunity - if stocks hit artificially low prices trading opportunities can arise for clients looking to capitalise on stocks they see as ‘weak and cheap’.  Sector news is also an obvious influence.  Looking at the top ten trades on the Barclays Stockbrokers platform yesterday, five of these companies were from the oil and gas producers, and mining sectors. Rockhopper Exploration Plc was the fourth heaviest purchased stock as the company became the first to find oil off the Falklands Islands in a discovery that could be beneficial to the new British Treasury.  Rockhopper’s(RKH) share price jumped 56 ½ to 94p following the announcement of the discovery.  With Desire Petroleum(DES) also exploring in the North Basin it is perhaps no surprise to see them as the sixth heaviest purchased stock.

Across the Atlantic, in the US the Dow Jones Industrial Average dropped by more than 1,000 points in yesterday’s session, the largest intraday drop in its history.  A ‘trading glitch’ appears to be partly responsible but a sell off as a result of continued sovereign debt ‘contagion’ fears developing across Europe also sent traders scrambling for the sell button.  In Europe concerns on the austerity measures being adopted by Greece do not appear to be abating.  Despite the support being provided by the European Union and International Monetary Fund the Euro has continued to fall against the US dollar.  On Monday 3 May EUR/USD started the week at around 1.3325 but over the course of the week it fell to as low as 1.2560 before rallying over the last 24 hours currently trading at 1.2729.  As you would expect EUR/USD was the heaviest traded currency pair on the BARXdirect: FX platform as clients take a flight to quality and the safer haven of US dollars.

So, the general feeling in the markets is clearly one of uncertainty.  Comparisons are being drawn with the financial crisis from 2008 with concerns that the sell off may escalate as investor panic sets in.  However it is worth considering that the economic landscape now is different.  When the financial crisis hit, global economies had not anticipated the extent of the problems they were faced with and recession rapidly followed.  Current events are taking place against a back drop of global economic recovery and 18 months experience of markets in turmoil so the context is different.  That said, it remains to be seen how markets will move next.

If you believe the UK recovery is set to continue 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 the opportunity to achieve enhanced returns from the UK markets over the next three years whilst having some level of security on the downside.  Though, with this investment, you might get back less than you invested even if you hold this to maturity and you may get back less if you sell it early.

Similarly, if you are looking for investment opportunity but feel nervous about the current market conditions, perhaps now is the time to add the expert services of a professional fund manager to your portfolio.  Barclays Stockbrokers' Funds Market offers a wide range of funds managed by some of the top managers in the business, and a host of tools and research to help inform your investment decisions.

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.

The value of with all these investments can go down as well as up and you may get back less then you invested.