Investment Newsletter - April 2012

Investment Newsletter April 2012

Born in the USA This month, Equilibriums’ investment analyst and resident American Eric Parker, takes a look at the presidential race and what it could mean for markets.

There’s more than 6 months until the next US president is chosen, but election fever has already taken hold back home.

From now until 6 November, the country will be engrossed with anticipation as all major news agencies will be flooding their news streams with all things presidential.

As we all know, this time around we’ve got a Democrat in office who’s running for a second term, with the Massachusetts governor Mitt Romney now as the likely Republican challenger. Over the next few months, both the favourite Obama and the underdog Romney will spend millions upon millions of dollars accusing each other of being the wrong person for the job.

In fact, after Rick Santorum suspended his campaign this past Tuesday which left Romney essentially winning the Republican bid, I’ve counted twelve ‘tweets’ from the Obama’s campaign staff over a twenty four hour period attacking Romney’s background and political stance.

A presidential race can often provide great entertainment with all the accusations, shouting, finger-pointing, banner waving, and they occasionally remind me of a thrilling WWE Wrestlemania event. We Americans love this stuff, so let the game begin.

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Investment Newsletter | April 2012

Stockmarket Boost?

One thing is for certain; both Obama and Romney will need a solid plan for keeping the current momentum of the US economic recovery going over the next four years. Both candidates should breathe easier as they could both potentially benefit from a surge in the US markets which tend to react positively in an election year.

History shows that the fourth year of a presidential term has often been good for equities, mainly because there is less risk of economy-damaging new legislation being introduced over the year. US markets should enjoy this election regardless of the outcome; either a re-election for Obama or a Republican victory, investors in US equities should win.

Historically, if a Republican succeeds in the election, the S&P 500 has seen an average growth of close to 19%. In the past, the market has responded badly to a first-term Democrat victory with the S&P down an average 2.7% in the years that has happened. However, if it’s a re-election of a Democrat, the S&P has seen a growth of 14.5%. This is possibly due to the presumption that any bad news for industry has already been factored in during the first term. Either way, based on historical evidence, it’s possible the US equity market will see some great returns whichever way the election turns out.

Over the past 6 months, US equities have been the best performing region. In March, the S&P reached its highest mark in over four years, since before the global financial crisis in 2008. With this being an election year, combined with the continuing inflow of positive economic data coming through in early 2012, it’s looking like the US market could potentially see some great returns this year.

Health Care I’ve just recently come back from the States after spending a sunny laid-back three weeks in my home city of Phoenix, Arizona. After a week, I was quickly reminded how troublesome and scary the health care system in the US can be.

Out of nowhere, we discovered a juicy blister on my four year old son’s thumb. We gave it a couple of days thinking it would pop on its own and simply vanish, but that was silly thinking. It grew larger, juicier, and was beginning to look like a miniature water balloon hanging off the tip of his thumb. Then we noticed the redness and immediately thought potential cellulitis.

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Investment Newsletter | April 2012

First, we took him to the local walk-in clinic to get it assessed. The first thing they ask from you after exchanging pleasantries is your insurance card. They then inform you how much it’ll cost just for an assessment or really, just for advice, without having anything physically done. We ended up seeing a nurse, who panicked and believed he needed to stay overnight in a hospital on a drip or face the consequences of having the tip of his thumb hacked off. No procedures were done but the charge for that wonderful advice was a whopping $175.

We then quickly went to the emergency room of the nearest hospital. The receptionist, naturally, asked us for our insurance card immediately. Very luckily, I knew one of the nurses at this hospital and managed to get to speak to her for advice on the poor boy’s thumb. She immediately brought a doctor into the waiting room where he assessed the thumb ‘off the record’.

The doctor wasn’t concerned with infection and gave us two simple choices. Either go home, heat up a needle, pop the blister yourselves, and then wrap it up in bandages laced with aloe vera cream. Or walk through those emergency room doors, let us do the exact same procedure, and charge you a tidy $2,000 bill. The choice was clear, even with the travel insurance.

This story is only a tiny example of what the health care system in the US is really like for citizens without insurance. There are millions of uninsured Americans that experience this sort of treatment on a daily basis for even the smallest of symptoms.

If you don’t have health insurance, you won’t have a family doctor. If you’ve got something wrong with you, whether it’s mild or severe, you pay a visit to the emergency room of your local hospital where, by law, they can’t refuse you care. Later, you’ll receive a hospital bill in the mail for thousands upon thousands of dollars which the patient will ultimately never be able to pay. That’s the trade-off for the uninsured - health care for your credit score.

Election Focus In the 2008 election, one of Barack Obama’s primary goals as president was healthcare reform; providing all Americans with health insurance. This is now universally known as ‘Obamacare’.

Clearly, given the above experience, there is still some room for improvement!

The Republicans opposed ‘Obamacare’ because they believed it to be unconstitutional and very expensive for the federal budget. Time will tell what effect this has on the US economy, but conservative commentators continue to attack it, whilst Democrats believe it could be a boost the economy.

What seems certain is that this time around, the economy will play a central role in whoever gets elected. With six consecutive months of job gains of 100,000 or more, Obama’s prospects for another four years look to have greatly improved. If these positive economic figures continue over the coming months, a Democratic victory looks more than likely.

Equilibrium Asset Management LLP Brooke Court Lower Meadow Road Handforth Dean Wilmslow Cheshire SK9 3ND United Kingdom Visit us at www.eqasset.co.uk t : +44 (0)161 486 2250 f : +44 (0)161 488 4598 e : askus@eqasset.co.uk Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Market Views | April 2012

General Economic Overview Global economic growth is likely to remain muted, but positive, mainly due to US and emerging market growth. We believe the UK will avoid a recession, but recession is already happening in the Eurozone. Interest rates are likely to remain low for the next 18 months at least.

Sovereign debt issues have not gone away and will concern markets for some time. Inflation is falling back but not as far as many had expected. We believe it could remain persistently higher than the Bank of England’s 2% target.

Asset class key + positive - negative = neutral (normal behaviour)

+5 -5

strongly positive strongly negative

Equity Markets We were positive on equities last month with markets at c5,900, based on valuations such as the price/earnings ratio. Since then markets have dipped back to c5,600 on renewed European debt fears. At this level, equities look even better value in our opinion. We particularly favour the UK market.

Outlook

+5

Fixed Interest Interest rate risk has receded for the short term but inflation could hurt bonds in the long term. Corporate bonds still provide reasonable yields and could do reasonably well in this environment. We are avoiding gilts whose values have been inflated due to recent risk aversion.

-1

Commercial Property Whilst the rental yield on commercial property remains attractive at over 6%, this is diluted by high levels of cash in property funds. We can foresee some capital losses although we believe these will be small and that overall returns will still be positive.

-5

Residential Property

-5

We believe prices are likely to remain flat over 18 months.

Cash With interest rates remaining at record lows, returns on cash could remain below average for some time. However, there is a short term safe haven appeal.

Balanced Asset Allocation For a typical balanced portfolio we are overweight equity and cash and underweight the other asset classes. Based on our above scores and current tactical positions we’d expect a Balanced Asset Allocation (excluding client cash) to return approximately 10.9% pa rather than the normal 8%pa.* A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5% means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall. * Includes Defined Returns holdings. See previous briefings for details.

These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser.

-5