6th July 2011

Thames River Multi-Capital newsflash

Our thoughts on the market

For the near 500 people that we saw during the recent Multi Manager Forum, thank you for attending. Those that attended will know that we believe the risk outlook favours equities, despite the ongoing global issues (the known unknowns) that have played havoc with investor sentiment in recent months.

Quite simply we remain optimistic for equity markets in particular for a number of reasons and our portfolios are positioned accordingly. Some of the key reasons behind our optimistic, if not bullish, stance are listed below and in no particular order:

1. The equity market (using the FTSE 100) has made no capital gain in index terms since March 1998 point to point, one of the longest such periods in history, and highlights the lack of expectation. These are not bubble conditions.
2. Company balance sheets are the strongest they have been for a very long time and ex-banks are under leveraged generally. This points to an ability to weather any further banking hiccups.
3. M&A activity, despite a dip in Q2, is running 30% ahead of 2010 levels and looks set to remain vibrant.
4. Dividend growth globally looks set to exceed inflation as strong cash flows, in the absence of capital expenditure and employment growth (the jobless recovery), kick in.
5. The recent soft patch in GDP and ISM data should recover. Japanese industrial production will be a catalyst here as it recovers from the earthquake and tsunami.
6. We are not convinced commodities can rise much further in the short term. In fact, we believe other parts of the market will outperform from here. Furthermore, the end of QE2 and no QE3 would support this notion. Any pull back in commodities would be seen like a tax cut or stimulant to global recovery.
7. There appears to be growing belief that the Chinese are near the end of their tightening cycle as far as monetary policy is concerned. Any such confirmation would be bullish.
8. We do not foresee any significant rise in interest rates until 2012 at the earliest and believe any further rate rise in Europe will ultimately prove to be a big mistake.
9. We believe the equity market is under-owned now and the bond market over-owned. We believe the bond to equity switch is only just beginning to gather momentum.
10. President Obama will want to be re-elected - he will not be if the economy is not creating new jobs.

We remain aware that there are many unresolved issues in terms of the global economy and volatility will remain a feature of the coming year or so. We are, however, reminded of one of Sir John Templeton's investment maxims at this point:

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”

We can debate whether we are at the first or second point here, but we are certainly not any further forward than that.

Equity investors are likely to remain defensive over the summer, preferring a 'wait for confirmation' attitude ahead of a pick-up in GDP, ISM and employment data and while the European Union continues to sort out its debt crisis. Stocks then have the potential to move higher in the autumn, even without any QE3. Our view is to increasingly position portfolios for this, as by the time confirmation is visible it might be too late.

An underweight position in bonds, combined with an overweight exposure to stock pickers, has not been terribly helpful of late, but not at all a disaster in performance terms either. Macro factors have been influential once again of late, but this is diminishing and we are more confident than for some considerable while that being pro-equity and underweight other asset classes will be rewarding over the coming twelve months

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