Recent market volatility

A number of clients have expressed concern as to the recent market volatility we have seen. I have therefore approached one of Standard Life's leading fund managers for an update as to future prospects in the markets :-

Recent performance

UK stocks were volatile, suffering significant declines through July but recovering most of this fall in August and September. Difficulties in the US housing market raised fears about the health of the US economy and the effect this could have on the UK and overall global economy. High yields bonds were caught up in a credit squeeze in the third quarter and experienced volatility as a result. However, later in the quarter, the Federal Reserve cut interest rates by 0.5% and a degree of confidence started to return to the market. The commercial property market continued to slow over the third quarter, with a further reduction in the level of total returns.

During the period, we took advantage of market volatility and new cash into the Fund to add to favoured stock positions. We started a new position in specialist lender Intermediate Capital. It is taking advantage of the current credit worries by pushing up prices as mainstream banks tighten their lending criteria. We have benefited in recent months from an underweight position in bonds issued by banks and our long duration position in a risk averse market. We bought bonds issued by South African retailer Edgars at a substantial discount to the price at which they were issued two months previously.

We remain positive on the outlook for the UK stock market. Valuations remain low relative to both history and bonds, and are supported by free cashflow, dividend yield and corporate activity. Fundamentals in the high yield market remain sound. Bond investors will continue to monitor US and European economic data for signs that the slowdown in the US housing market, and the associated disruption of credit markets, may be increasing the risks of a recession. While there are short-term concerns over commercial property, the asset class should continue to deliver robust returns over the longer term. Property fundamentals, such as strong tenant demand, strong rental growth and a robust economy, remain in place and will continue to drive the market going forward.

Basically, "don't panic Mr Mainwaring!" Whilst recent ups and downs have been worrying, there has been a lot of bad news in a very short period of time (oil price records, government instability and errors etc) - once this settles down the markets should pick up nicely.