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

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During the first half of the month the global equity rally continued on the back of fantastic earnings from UK companies and American corporations, which pushed the FTSE 100 to new 18 month high. However, on the back of European sovereign debt concerns the second half of the month saw the FTSE 100 erase those gains and finish 2.02% down.

Greece finally requested assistance from the IMF and EU countries and the emergency financial support mechanism was activated. This was after concern that the Greek Government could default on their debts. Greek debt yields rose to an all time high. The activation of the mechanism had strict budgetary rules in which Greece had to cut its public spending by another £9 billion. Furthermore, investors looked across the Eurozone and identified that countries such as Portugal, Spain and Ireland were also in danger of defaulting on their debt. This fear spread through the markets in the final week of the month, particularly affecting the banking sector.

The UK economy produced its second quarter of positive growth and successfully avoided a double dip recession. The growth rate was only 0.2% compared to the 0.4% in the previous quarter. This lower than anticipated growth rate was attributed to the poor weather conditions at the start of the year. The UK economy finally started to benefit from the falling value of the British pound as British export sales increased by £4.4 billion over the first quarter. This is inline with expectations that the British economic recovery will be supported by strong exports.

We feel that the recent decline in the FTSE 100 is a healthy set back. These corrections stop bubbles forming in the market and are perceived to be healthy for future growth. Looking to the future, there are signs that the US economy is emerging strongly from the recession. It is starting to generate jobs and company profits are beating expectations. The UK is slightly behind the US economy but we suspect the UK will start generating jobs within the next six months and growth rates to increase throughout the year.

April was a difficult month for global equities and bonds as the uncertainty in the market sent major indices southwards. Nevertheless, none of our portfolios made a loss and, even more impressively, the Absolute Return portfolio generated profits of 0.2%. The Absolute portfolio once again proved its worth as an alternative to a deposit account or cash ISA in its ability to generate steady and stable returns. The star fund of the Absolute Return portfolio was the GLG Total Return Bond. This bond fund was chosen to be included in the portfolio because the manager holds a negative view on the market conditions and holds synthetic short positions in bonds, which makes it possible for the fund to benefit from declining markets.

Our flagship Cautious portfolio also performed inline with expectations and generated returns of 0.12% over the month. However, some components of the portfolio continue to under-perform, namely Octopus Absolute UK Equity and Invesco Perpetual High Income. Due to the current political and economic uncertainty facing the UK, including important factors such as the hung parliament, European debt issues and volcanic distribution, we believe it would be the wrong time to make any drastic changes to the portfolio. Therefore, we have given these funds six weeks to improve their performance; if they fail to improve over this period, we will write to you for permission to switch the funds; only then will there be more clarity on the headwinds facing the UK economy and we will be able to make a more informed decision on the future strategy for the portfolio.

The Icelandic volcano

The Icelandic volcano and its vast ash plume has caused massive distribution across European airspace over the last month. With tens of thousands of disgruntled passengers stranded across the world and holiday firms and airlines forced to pay compensation, is this going to affect the economic recovery?

The airline and tourism industry in recent times has been plagued with an unfortunate set of circumstances. During 2008, when oil spiked to $147 a barrel, many airlines were unable to operate even their basic flights at a profit. The bad luck continued throughout 2009 as the global recession hit, which in turn lead to a fall in demand for flights and holidays. The ill fortune persisted this year with the unprecedented closure of airspace caused by the volcano. This has left many major airlines in awkward financial positions and large companies such as British Airways were losing £20 million a day. If this was to continue for a sustained period of time, it would not be difficult to imagine that airlines would follow in the footsteps of the banking sector and require some kind of financial assistance by the government.

Beyond the tourism sector, the lack of air travel is fundamentally affecting the services industry in the UK, which accounts for 70% of the economy. Recent data reflects this trend and suggests that the UK service sector growth has declined during April. Nevertheless, the data still suggests that the service sector is expanding, only at a slower rate than expected, as the economic effects from the volcano caused havoc on general businesses.

However, there are still positive signs of growth within the tourism sector as chartered flights have increased by 6% globally and during the summer it is expected that there will be 8% more flights across Europe than in 2009. Even more importantly, the summer holiday season to resorts such as Greece and Spain is only just beginning, therefore, the disruption is less of an issue than had it occurred during the peak of summer.

Overall, there is no doubt the volcano has made lasting damage on the tourism industry but the effects on the whole economy will be dependent on how long this volcano continues to erupt.