This commentary was produced on 10th May 2010. Please note that Fund Managers' views can change and that this is particularly likely during periods of rapidly changing market circumstances.
John Chatfeild-Roberts, Chief Investment Officer at Jupiter, comments on stock markets after the UK election:
"The election results are now in: everybody lost. Initially, sterling fell against both the euro and the dollar before strengthening slightly as the chastened Lib Dems offered to support the Conservatives later on Friday morning.
"The FTSE fell sharply as the final results trickled in, hitting a low of 10+% below its 2010 high of 5,825. But as I have been saying for a number of weeks, this move had little to do with the local issue of an election. It may be the case that UK investors would feel a bit more comfortable with a Tory/Lib pact than a Lib/Lab pact when it comes to taking action on our budget deficit, but in reality markets are assuming that broadly sensible economic policies will be followed whatever coalition or minority government arrangements are agreed.
"For now, market participants remain focused on the bigger issue of the Greek debt crisis and its possible effects on the euro and eurozone countries. The ?750bn package of financing measures unveiled by EU finance ministers has gone a long way towards reassuring the market, and Greek government bond yields have narrowed considerably. That said, sovereign debt remains an issue.
"Since the introduction of the euro, the continent's economies have become increasingly interwoven. Banks and governments in five weak European economies - Portugal, Ireland, Italy, Greece and Spain (the PIIGS) - owe each other, and their richer neighbours such as France and Germany, many billions of euros.
"What happens in one country will affect the rest and the risk of sovereign debt default, not just in Greece but elsewhere, persists. According to economists Reinhart and Rogoff, sovereign defaults are often preceded by a massive run up in debt, typically a 40% rise in the four years prior to the default. Greek debt is currently predicted to rise by this amount between 2007 and 2011.
"It is true that high levels of debt are not just a eurozone problem. The debt to GDP ratio in the UK, for example, is also forecast to rise 44% in the next few years if firm action is not taken*. Furthermore, a lot of UK government debt is held by overseas investors, making us vulnerable to any loss in investor confidence and higher interest rates. So whilst international markets are giving the UK the benefit of the doubt for the present, the new UK government needs to get its act together to prevent a step change in the bond markets perceptions of Britain's credit worthiness.
"We have to accept that in the last 10-15 years, everyone in the country has had a party on the back of ever-increasing debt. That party is over. Now it is time to pay for it.
"However, for long term equity investors, the currency moves and market falls we have seen bring opportunities; but to make the best of them, investors need to be positioned correctly. In our view, that means investing in companies that are not dependent on single markets and having actively managed portfolios that are broadly diversified by asset class, geography and currency."
NOTE
* Source: FT, 2 May 2010
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. They are both subsidiaries of Jupiter Investment Management Group Limited and the group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances. Their views are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.