Welcome to our July update, reviewing the performance of the markets, our suggested portfolios and keeping you informed of progress.

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June was another poor month for global equities, which saw the FTSE decline 5.1% on fears that the global economic recovery was slowing down. The failure of the American private sector to generate jobs and reduced public spending by European nations contributed heavily to the decline in global markets.

The US economy has been beset over the last month with signs of weakness in the economic recovery. The May Employment Report was a disappointment, with payrolls coming in weaker than expected and private-sector employment particularly disappointing. Last week’s retail sales undershot expectations, falling 1.2% m/m, well adrift of expectations for a gain of 0.2% The general fear is that as the US starts to wind down its massive fiscal stimulus package, the economy will no longer be able to support itself and head back into recession.

On the 22nd of June George Osborne presented the coalition government’s emergency budget to the houses of parliament. This budget outlined plans on reducing the government debt through a combination of public sector spending cuts and raising the level of taxation. The cuts in public spending are the deepest since the end of World War II as governmental departments are asked to find savings of 25%. The effects of this budget will be felt across the UK, with up to 600,000 people in the public sector losing their jobs over the term of the parliament. For information see article

In the Cautious Portfolio, due to the continued poor performance of the Octopus UK Absolute Equity fund, we have decided that your interests would be better served with an alternative fund. The fund we have selected is Insight Absolute Insight, which, like the Octopus Fund, is a member of the absolute return sector. This fund has performed consistently above the sector average and should give the fund additional downside protection moving into the future. By making the switch it will marginally reduce the risk profile of the cautious portfolio and subsequently its volatility.

In the Abosulte Portfolio, we are replacing the Cazenove UK Absolute Target fund, as its performance has been poor in recent months and its volatility is not consistent with the Absolute portfolios mandate. This fund will also be replaced with the Insight – Absolute Insight fund as we believe its low risk approach and steady performance will be able to produce returns independent of market conditions.

In recent months many of our international equity funds such as Premier Global DSR, Neptune US opportunities and the First State Global Opportunities fund have suffered exaggerated losses due to their large allocations in the American market. This is because the pound has been strengthening slowly against the dollar; therefore the currency exchanging mechanism is affecting the profits of these funds. US companies this month will announce their second quarter profits, which should give us a better indication of the economic strength of the country and make it possible for us to make more informed decisions about the future of these investments.

Is China still looking like a good investment?

The economic revolution that has occurred in China over the last 20 years is nothing short of a miracle. This was built on the back of cheap labour and large natural resources and has made China the world's production house. However, in recent months, with China revaluing the Renminbi and Chinese workers demanding more money, is this the end of the economic miracle?

The Chinese authorities announced a move to a more flexible management of the Renminbi, which had been pegged against the US dollar since July 2008. China succumbed to international pressure, holding their currency at artificially low levels to give their exports an international advantage. This move may be positive for the rest of the world as it helps to use market forces to rebalance international trade. Nevertheless, it could seriously increase the value of China’s exports in international markets and subsequently reduce the demand for their products. This will reduce the profitability of many of the large Chinese companies and could slow economic growth in the country. Even so, the appreciation of the renminbi will be relatively slow due to the daily growth cap and the basket of currencies it is now pegged against. Most estimates suggest that it will take one year for the currency to rise by 3-5%.

The cheap labour that helped the Chinese economy grow so rapidly may be coming to an end as the workers rebel in search of a livable wage. There have been various high profile walkouts by Chinese workers in companies such as Toyota and Hyundai leading to staff pay rises of 30%. With growing fears of unions and worker pressure, the Chinese government is increasing the average minimum wage across nine providences in an aim to curb discontent amongst the workforce. These wage increases will no doubt reduce the overall profitability of the firms and make goods produced in China more expensive. However, by putting more money in the Chinese workers’ pockets, this allows the domestic economy to grow, as the average consumer will now be able to purchase more goods. It could actually be a very strategic idea, as the global output continues to decline, it would be better in the long run for China to have steady growth in wages to generate a domestic economy.

Overall, there are some obvious headwinds that will face the Chinese economy in the short term. In spite of that, as the domestic consumer grows and China’s internal economy expands to be the largest consumer market in the world, you would have to think that investing in such a dynamic country will be profitable in the long term. Like all investments in emerging markets we would warn you these markets are often volatile and only for the experienced investor. If you would like to gain exposure to China we currently offer a specialist fund in this sector.