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Market Bulletin
MONDAY 22 NOVEMBER 2010
Tel: 01437 766396
Email: [email protected]
Website: www.burchwealthmanagement.co.uk

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have pushed for it to be raised in return for the bailout. This
This weekly Briefing Note aims to pick out some of the was denied by such luminaries as Nicholas Sarkozy, the
key financial and economic issues touched on in the French president, but he was quoted as saying, “It‟s
press over recent days and from time to time includes obvious when faced with a situation like this, there are two
the views of some of our independent fund managers. levers to use, which are spending and revenues. Why not
use them? They have a greater margin for manoeuvre than
Irish bailout talks continue others, with their taxes being lower than others.” Other
governments have long
Going into the weekend, the Irish government was still
hammering out the final details of an emergency criticised the rate, and argue that it is unsustainable and
financial programme to stabilise their economy, paving distorts the market for attracting large corporations. But
the way for the eurozone‟s second bailout of 2010. even as late as Friday, Ireland‟s Deputy Prime Minister,
According to The Financial Times, the plan will Mary Coughlan, declared that the rate was “non-
involve at least €15 billion of spending cuts and tax negotiable”.
increases from 2011 to 2014, which is equal to around
10% of the Irish annual economic output. Experts from The Sunday Telegraph reported that Ireland is facing a
the International Monetary Fund (IMF) and the mass exodus from some of the biggest American
European Union (EU) have combed through the balance companies, as executives at Microsoft, Hewlett-Packard,
sheets of the banking sector, as well as the public Bank of America, Merrill Lynch and Intel spoke of the
finances, to determine the size of the bailout but it is “damaging impact on Ireland‟s ability to win and retain
thought to be €80–90 billion, slightly less than the €110 investment” should the corporation tax rate be raised. As
billion rescue received by Greece in May. However, it well as these US behemoths, FTSE groups such as
is likely that the bailout will not be announced until advertising giants WPP, magazine publisher United
mid-December, as it was warned that it will take weeks Business Media, and Shire Pharmaceuticals have all
to finalise the minute detail involved in any deal. relocated to Ireland recently to take advantage of the lower
rates.
It is hoped that the announcement of a convincing
IMF/EU plan will drive down Irish government bond The British government is keeping a very close eye on the
yields, allowing Ireland to return to debt markets and
situation, according to The Independent on Sunday, and
avoid the perceived humiliation of drawing on the UK economy has a high level of exposure to Ireland.
emergency foreign loans. The initial news of the talks Royal Bank of Scotland, for example, was owed billions
helped narrow the yield spread between Irish bonds and according to the latest data in June of this year. Britain‟s
German bonds by 19 basis points by the end of the Chancellor, George Osborne, declared, “It‟s in Britain‟s
week, and Irish ten-year yields tumbled by 90 basis national interest that the Irish economy is successful and
points on Thursday and Friday alone. In the currency we have a stable banking system.” The UK is set to provide
markets, the euro was buffeted to a six-week low as the around £7 billion towards the rescue deal, though a
drama played out, but managed to scrape back some Treasury spokesperson was at pains to insist that Ireland
losses before the end of the trading week, particularly had not yet requested any aid.
against the dollar.
Banking outflows
Although Brian Lenihan, the Irish finance minister, has
indicated that the country‟s 12.5% corporation tax rate The effect of all this debate on the future of the Irish
(the lowest in the eurozone) will not be raised, a number economy is being felt by the nation‟s banks, as The Times
of factions within the European Union are known to
reported, as Allied Irish Bank (AIB) has suffered €13 Nevertheless, following on from the sovereign jitters earlier
billion in withdrawals this year, with €12 billion of that in the year, we draw a clear distinction between business
coming since June as companies and large investors and economic conditions in the southern periphery of the
withdrew funds that weren‟t covered by the state‟s eurozone, labouring under the burden of higher cost
guarantees of €100,000 on retail deposits. Last week, its structures, and its northern „core‟ tier. For the south
larger rival Bank of Ireland signalled a €10 billion (roughly Greece through Portugal) currency devaluation is
outflow of corporate deposits in the third quarter, which not an option, and it will see relative deflation, which will
amounted to roughly 12% of its deposit base. AIB also doubtless be painful. But the reverse of this is the prospect
revealed that its planned rights issue would raise €6.6 of rather better growth rates in the northern tier. This will
billion, up from the expected €5.4 billion. The provide a backdrop for northern European companies
government will convert €2.9 billion in preference altogether more benign than that of the last year or two,
shares after the rights issue, leaving it with a stake of further enhanced by the steep euro devaluation relative to
around 95%. the dollar since the autumn of last year.”

Problems in the Irish economy and banking system have Costly Errors
put the security of savings back in the spotlight. As
highlighted in The Mail on Sunday, savers are being The dangers of trying to time equity markets were
warned once again to check that their money is highlighted in The Financial Times, as they published
protected by compensation schemes. Post Office research showing that UK investors are losing out because
accounts, where savings are provided by Bank of of market timing errors. Over the 18-year period from 1992
Ireland, have recently been moved so that UK savers are to date, investors attempting to time their investments were
under the wing of the Financial Services Compensation typically 20% down on the return they would have had if
Scheme. Until the start of the month, deposits were they had kept their money invested in the market. This
covered by the Irish government. But with many brands figure rises to 2.27% per year when trying to time global
being owned by the same banking group, it is up to equity markets, which were generally more volatile,
savers to ensure they have not exceeded the limits meaning that investors who tried to time the market were
within one group. missing out on extreme bounces. This theory is backed up
by separate research from Fidelity, which shows the impact
Does opportunity knock? on returns over the long-term if just a few good days are
missed in equity markets. It found that investors who
Global equity markets rallied late in the week after placed £1,000 into the FTSE All-Share in October 2000
initially being rocked by both the Irish debt crisis and would have seen their investment grow to £1,330 by
the Chinese government trying to limit inflation by October 2010. However, if they had missed the ten best
tightening its banking reserve requirement for the fifth days during that 10-year period, their value would actually
time this year. The FTSE 100 closed the week at show a loss and would be worth just £720. If the best
5732.83, down 1.1%, after battling back with gains on twenty days were missed, then the value dropped to £475.
Wednesday and Thursday. Amid all the negative The article went on to cite research from Blue Sky Asset
sentiment within the eurozone, The Sunday Times put Management which suggested that a more relevant lesson
its head above the parapet to suggest to investors that for retail investors was to look at the effect of sitting in
they could use the situation to their advantage by cash for a year after a market low – a more likely response
scooping up European stocks that have failed to rally of investors spooked by equity market lows. The research,
with other markets, and may well “present a real using analysis of UK bear markets since 1972, found that
opportunity”. The FTSE Eurofirst 300 Index, which fell this could cost investors up to 75% over the following four
2.3% on Tuesday when it appeared any bailout would years. Whichever research is deemed most relevant, it is
be rejected, did actually make up some ground by the clear that over the longer term, resisting the temptation to
end of the week to close just 0.16% down. The switch between asset classes depending on short-term
difficulties in Ireland, as well as Greece and Portugal, performance increases the chances of delivering long-term
have held back European equity markets throughout the returns.
year relative to the rest of the world.
Key week for UK exporters
Stuart Mitchell of S.W. Mitchell Capital, who manages
the St. James‟s Place Continental European portfolios, Critical growth figures this week will tell the Bank of
recently reported, “Even if one chooses to see the glass England whether exporters are finally using the fall in
half-empty, and we are in the half-full camp, European sterling to rebuild their foreign markets, reported The Mail
shares are good value and trading on some ten times on Sunday. Despite a 25% drop in the UK currency since
prospective earnings. European markets also continue to the summer of 2007, which makes British goods cheaper in
trade at significant discounts to the US market despite overseas markets, there have only been muted signs of an
their corporate sectors being just as profitable. Equities export-led recovery. Wednesday‟s second official estimate
are as cheap as ever relative to bonds and cash. Our for the size of gross domestic product in the third quarter of
meetings with companies continue to confirm that many this year will coincide with public speeches from the two
traditional institutions, such as insurance companies, members of the Bank‟s Monetary Policy Committee (MPC)
still have scant exposure to equities. with the most divergent views. On Tuesday, Adam Posen,
who wants an increase in quantitative easing, will speak in
“It is to our mind encouraging that so many investors Sweden, while on Wednesday Andrew Sentance, who
remain cautious, if not downright pessimistic. wants a rise in the official interest rate, will make a speech
in Belfast. Posen fears a return to recession, while public remarks are likely to highlight the committee‟s
Sentance is worried by inflation. Both men are, at three-way split.
present, alone in their views within the MPC but the

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