Wednesday, March 10, 2010

Are we close to a leg down?

So far it's been a good first quarter . Markets have been risk-on and the portfolio has gone a long way to recovering from the hammering it took in 2008.

Of late I've started to think again about raising cash. None of the macro news fills me with enthusiasm. Apologists have been saying that the weak consumer confidence, employment , construction and home sales numbers can be put down to the miserable winter we've had. Let's hope so.

There again after the huge fiscal stimulus in the US and the UK we should surely now be setting ourselves up for some fairly robust growth in H2 . However, as it stands 1.5% seems to be the best that the US can hope for as inventory restocking seems to have run its course. Even more challenging will be the drag effect as the economic boost from the huge wave of fiscal stimulus starts to reverse and weaken later in the year. On this basis maybe the 1.5% GDP growth I've got pencilled in for H2 might prove to be too bullish. It's also possible that on this side of the pond the BoE will have to consider more QE despite its depressing effect on Sterling and imported inflation.

This afternoon I read that the UK's FSA regulator has mandated the banks to run a new round of stress tests based on a double dip recession and an unemployment rate of 13.3%. This assumes a further 2.3% fall in GDP for a total contraction of 8.1% from the peak of the boom in 2007. Ouch! That's a shocker. Wonder why they chosen to come out with these new and tougher stress tests now? Could it be banks still remain wildly leveraged - I hear 10 to 15 times remains the norm. If so expect a lot more capital raisings to boost equity levels.

Maybe I'll just sit out the rest of the quarter and watch what equity markets do - valuations are once again looking challenging. Corporate bonds still look attractive to me - certainly corporate balance sheets look as strong if not stronger than their sovereign counterparts.