Signs of Life in Global Markets

01/26/2009 9:46 am EST

Focus: GLOBAL

Andrew McHattie

Editor, Investment Trust Newsletter

Andrew McHattie, editor of Investment Trust Newsletter, offers a preview of the 2009 global markets.

2008 was a grim year for investment generally, and a grim year for investment trusts. There was no escape from the malaise of the credit crunch and the recession as the FTSE 100 Index sank by 31.3% over the year, and the FTSE 350 Equity Investment Instruments Index fell by 36.1%.

This underperformance from investment companies came as emerging markets sunk far more quickly, and there was also some degree of discount expansion. This was particularly true in certain sectors such as private equity, property, and hedge funds. There were very few winners over the year. Biotechnology and life sciences was the best performing sector, whilst Europe and emerging markets fared particularly badly.

As usual at this time of year, the Association of Investment Companies (AIC) has asked UK fund managers for their views on the year ahead. The AIC received responses from fund managers representing ?23bn in assets.

Just under two-thirds of fund managers (62%) were optimistic that markets generally will rise in 2009, but a significant 38% of managers disagreed. There was a diversity of views on where the level of the FTSE 100 would end up in 2009, with most managers (54%) expecting the index to close between 4500 and 5500, but 23% of managers expected the index to close below 4000. (It closed just above 4000 Friday-Editor.)

Blue chips were tipped as the sector most likely to outperform for the third year running, and the US was tipped to be the best performing region in 2009. Not surprisingly, the majority of managers (54%) thought the global recession was the greatest threat to equities, whilst attractive valuations (44%) were the managers' greatest cause for optimism.

Few, if any, managers think 2009 will be easy. Bruce Stout, the manager of Murray International  Trust (LSE: MYI), said, "Companies will be reporting bad news for months to come as the financial crisis hits the real economy. Most stock markets around the world will not start to recover properly until the second half of 2009. However, in the case of the UK, it may take longer; being hindered by a huge debt mountain, rising unemployment, and weak currency. That said, for investors willing to take the pain of short-term fluctuation, attractive long term investment opportunities are appearing around the world."

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Katherine Garrett-Cox, chief executive of Alliance Trust (LSE: ATST), agreed, saying "we anticipate that global economies will continue to slow and market conditions will remain very challenging. The coordinated global economic rescue package will take some time to have the desired effect, but before stock markets can begin to recover, we need to see a realism in future earnings estimates, further de-leveraging of the financial system, and a returning to normalized bank lending conditions."

The global growth sector saw net asset falls averaging 28% over the last year, but it remains by far the largest sector, with ?14 billion of assets.

Japanese trusts performed better than many others last year, with an average loss of just over 20%. [Managers of] Atlantis Japan Growth UK (LSE: AJG) are not expecting too much in the way of good news from the Japanese economy this year, but they are more optimistic [about] a strong rebound in the economy and corporate earnings in the fiscal year to March 2011.

They say that most medium-sized and larger Japanese corporations are generally in good shape financially, with only limited debt, and are otherwise well-positioned to weather the worldwide economic slowdown. Japan's financial system is also basically sound, they say, with few credit problems from exposure to subprime-related debt and are in no need of government help.

Atlantis argues that since most Japanese institutional and individual investors are underweight in equities, they would expect to see money moving back into Japanese equities at some point, particularly once confidence starts to recover.

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