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

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May was a poor month for global equities as a combination of factors drove the FTSE 100 down 6.11% and for a brief time below the psychologically important 5000 mark. The world markets were stung by a series of events unfolding across the Eurozone as they tried to tackle the massive public debt. This, coupled with the gulf oil spill, left many investors flocking to safer assets such as gold, treasury bonds and the dollar.

The troubles across the Eurozone intensified during the month as the European Union (EU) members, together with the International Monetary Fund (IMF), have agreed a £90 billion three-year bail-out package for Greece. Furthermore, The EU and the European Central Bank (ECB) announced a massive £600 billion emergency funding package in order to protect the single currency and European countries from their massive debt burdens. This package is an overwhelming response to the crisis and in essence tells the market that the EU is willing to do anything to defend the Euro. The main uncertainty plaguing the Eurozone countries is to what extent the massive spending cuts and tax rises will have on the future economic growth. With many European governments unable to afford to use expansionary fiscal policy to stimulate the economies, the possibility of the region suffering a double dip recession increases.

It is hard to escape the enormous ecological catastrophe currently occurring in the Gulf of Mexico as thousands of barrels of oil leak unrelentingly into the ocean. The environmental effects of this disaster will cause lasting damage to the delicate ecosystem. BP plc, who are responsible for the oilrig, are undertaking the mammoth task of stopping the leak and completing the clean-up operation. BP share prices have fallen almost 35% since the start of this crisis and it is estimated that BP has spent over £1 billion to try and stop and clean up the oil spill. Unfortunately BP is one of the largest components in the FTSE 100 and its decline alone has taken a sizable amount off the FTSE 100 over the last month. Moreover, BP is in the cornerstone of nearly all income funds in the UK and with BP likely to suspend dividends this could leave the whole sector struggling to produce suitable yields. President Obama is currently using strong rhetoric against the oil giant and it would not be surprising if the company faced hefty fines in the future for the damage caused in the region.

At the start of May the UK populace went to the polls in a general election. As predicted by many political analysts, the outcome was a hung parliament. After days of intensive negotiations between David Cameron’s Conservative party and Nick Clegg of the Liberal Democrats, the first coalition government for 36 years was formed between the two parties. After a variety of compromises the coalition government has laid down plans to cut public spending by £6 billion and to hold an emergency budget on the 22nd June.

After a poor month for global equities, we were happy that a couple of the absolute return funds lived up to their name and actually produced positive returns; namely the GLG total return bond and Standard life Global Absolute Return strategies fund, producing profits of 3.26% and 0.66% respectively.

Last month we mentioned our continuing disappointment with Neil Woodford Invesco Perpetual High Income and David Crawford’s Octopus Absolute UK Equity. Largely due to the overwhelming uncertainty at the time we decided it was best to wait until there was more clarity in the market before making any changes to the portfolios. The fund managers were both given a performance-based ultimatum in which they would have to improve performance suitably over the next 2 months. During the month the Neil Woodford fund outperformed the sector average by 2% and continued to perform during the start of June. Neil Woodford has refused to hold banking stocks since the outset of the financial crisis and furthermore, he sold his entire stake in the oil industry as he believed that the major oil players would be unable to maintain high dividend yields in the future. On the other hand, David Crawford performance continued to be poor. Conversely, he holds large positions in the financial and oil sectors. We will review the position again on the 1st July 2010.

Where does the global recovery go from here?

With the global economy still facing strong economic headwinds from the likes of high unemployment, sovereign debt, weak international trade and indebted consumer, will the global economy be able to fully recover?

The financial crisis started in the big financial institutions in 2007 and subsequently moved into the real economy towards the end of 2008 and caused all developed nations to enter in to recession. This was disastrous for many businesses as the tighter credit conditions and reduced demand for goods and services forced companies to downsize their workforce, which in turn doubled the rate of unemployment in the UK and US. Nevertheless, since the beginning of 2010 there has been an air of optimism about job growth across the pond as the massive US stimulus package has generated approximately 2.7 million jobs (Non seasonally adjusted) and the outlook for future growth remains positive. The picture in the UK is not as promising, however, in recent business surveys the manufacturing and service sectors are in a growth cycle and many businesses are starting to rehire to meet this newfound demand. Job recovery normally lags behind economic growth by 6 to 12 months, therefore it is suspected that the UK will start to see unemployment starting to reduce by the end the year.

From the outset of the “Great Recession” it was important that government played an important role in stimulating the Economy by using a combination of tax cuts and spending to try and smooth out the decline in the economy. Moreover, many countries found it necessary to step in to stop the failure of the banking sector and to protect the public’s savings held in those institutions. Excessive Sovereign debt is a serious risk to future global growth as it reduces the ability of the government to provide services and many countries waste a large amount of their tax receipts servicing this debt. Over recent months nearly every single European country has announced massive plans to try and reduce public debt. This will not happen over night and will be a long drawn out process but with the government’s willingness to reduce borrowing this should provide benefits in the long-term, as governments will be forced to be more efficient and effective with the tax collected.

During the dark days of the global recession, international trade collapsed, with some regions reporting a 30% reduction in exports. This weak environment causes lasting damage to large and small companies alike. Nevertheless recent signs from the emerging markets suggest that trade is starting to gather pace, with countries like China and India growing rapidly on the back of international trade. Furthermore, the biggest consumers in the world (the US) are starting to put their hands in their pockets to purchase big-ticket items such as cars and widescreen televisions. This positive upward trend in retail sales across the globe is supporting the idea that the economic recovery is stronger than first predicted.

One of the many concerns in the UK is the current level of debt facing the consumers. With a decade of easy credit and a booming housing market, the average consumer indebted themselves to greater and greater extent. This debt will reduce the disposable income of the UK public in the future and could seriously damage a recovery. However, interestingly enough the average consumer has been paying their debt and saving more than ever. To expand on this idea, with house prices seemingly on the rise again and the equities enjoying a strong 12 month rally, the average consumer is now feeling more wealthily and more willing to spend their money. The retail and service sectors are still improving and the future looks far better than was predicted during the start of the recession.

The strength of the recovery is always going to be in question and there is no doubt that the economic recovery is going to be a slow and gradual process. Yet, there are currently plenty of early signs that the recovery is taking a firm hold but it might not be the growth the west is used to.