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A large proportion of the demand for commodities in 2012 will be driven
by the risk appetite of investors and demand from emerging markets
globally. The immediate outlook for the assets class remains uncertain.
Commodity prices generally have fallen since June 2011. We remain
cautiously optimistic for a recovery as the opportunities over the longer
term remain but we expect heightened volatility.
The tensions in the Middle East are set to rumble on and the price of oil
is important for the economies of the west as they struggle to overcome
their government deficits. A spike in the oil price would be damaging and
the focus remains on Syria which could easily fan the flames if
neighbouring countries such as Iran become further entangled in the
struggle. A high price for oil naturally impacts upon the cost of fuel, which
in turn keeps household bills high.
The outlook for Gold looks supported at these levels as it is seen as a safe
haven (although this too can easily reverse) in uncertain times such as
now, as well as providing some protection against expected increases
in inflation.
COMMODITIES
The large outflows of private client and pension fund monies away from
equities continued during the year on the back of equity market volatility
and weakening confidence. Government debt has been the beneficiary
of much of this investor repositioning and US Treasuries and UK Gilts were
among the best performing asset classes of 2011.
Ten year UK and US government bond yields began the year at around
3.5% and ended it at around 2%. By definition, bond prices (which move
inversely to the yields) can only go so high, as yields can only go to zero.
At present this is where short-term UK and US government bonds currently
stand. Whilst this situation can be sustained as investor appetite for riskier
assets remains subdued, we are concerned that investors could lose
money very quickly when sentiment turns.
European government bond yields as an average have pulled back from
their high ‘crisis’ points but still yield over 5%, indicating market
nervousness. In the light of the continued uncertainty surrounding the euro-
zone and its currency and the over-valued US and UK issues, we maintain
our view that western government debt is unattractive.
Income was once again the main component of returns from the UK
property market in 2011. Across all UK regions capital growth is sluggish
and it remains a highly polarised market, with Prime areas such as London
and the South East holding firm. International buyers continue to perceive
London as a desirable safehaven and this demand should provide support
to prices.
The US property market has suffered greater capital losses (since 2007)
than the UK but may finally be showing signs of getting better. In
November the US pending-home-sales index increased by a strong 7% to
its best level since April 2010, which was a time when the housing market
was being supported by the government’s homebuyer tax credit scheme.
The latest construction spending report was also well ahead of
expectations with most of the strength in private housing.
Our outlook on property remains neutral. Whilst the current level of
economic uncertainty persists and until there is a greater likelihood of
capital appreciation, we advocate limited exposure to this illiquid asset
class and even then, only to the very best assets in the Prime sector.
PROPERTY
STERLING NON GILTS TOTAL RETURN 2 YEARS
GOLD & OIL & S&P GLOBAL COMMODITIES
FTSE ALL UK PROPERTY & HALIFAX PROPERTY & CASE-SHILLER US
HOME PRICES TOTAL RETURN 2 YEARS
PAUL STEVENS
Chartered FCSI
Investment Manager and Branch Principal
Direct: +44 (0) 20 7491 5091
Email: paul.stevens@1stportasset.com
MELISSA LONGLEY
MCSI
Investment Manager
Direct: +44 (0) 20 7491 5092
Email: melissa.longley@1stportasset.com
NICK PALMER
MCSI
Investment Adviser
Direct: +44 (0) 20 7491 5093
Email: nick.palmer@1stportasset.com
16 Dover Street, Mayfair, London W1S 4LR
Tel: +44 (0) 20 7491 5099
Fax: +44 (0) 20 7499 3290
www.1stportasset.com
Markit iBoxx Sterling Non Gilts AAA TR: 16.14 BotA Merrill Lynch Global Emerging Market Sover CR: 7.6
FTSE A British Govt All Stocks TR: 23.8
S&P GSCI CR: 27.73 Cust Index Gold Spot $/Oz: 79.80 ICE Crude Oil CR: 43.6
S&P/Case-Shiller U.S. National Home Price Index FTSE All UK Property (NAV) T
Halifax Property Seasonally Adjuste
Accordingly, our recommended exposure to fixed income continues to b
through quality corporate bonds and selective higher yielding corporat
and emerging market bonds. We believe that convertible bonds, whic
are a hybrid of fixed income and equity,are also attractive.