Archive for December, 2010

The Year In View

As this will be the last comment to be posted for 2010, it seems the appropriate place for some reflections on the year (almost) gone by.

Since this blog began in July, one consistent view has been that while the world economy would continue to recover, it would do so patchily. Equity markets agreed. At present, the S&P 500 has risen by 11.5% year to date; the Nikkei 225 is down 3.1%. In Europe, the stronger countries turned in some of the best equity market performance in the world, with Germany’s DAX up 18.4% and Sweden’s OMX higher by 21.6%. At the other end of the spectrum, Ireland’s ISEQ fell by 4% and the Athens Stock Exchange General Index stands a staggering 33.7% below where it started the year. Our own FTSE 100 index is in the middle, having risen 9.1%.

Despite the recent sell-off, bond markets – which reached crazy levels earlier in the year – have generally turned in a strong performance over 2010 as a whole. Ten year US, German and UK yields have fallen by 40-50 basis points (0.4-0.5%) year to date, implying price gains of around 3-4%. Unsurprisingly, the exceptions were the more distressed European government bond markets, with ten year Irish bond yields 350bp higher and the yield on ten year Greek paper up by almost 600bp.

Commodities have enjoyed a strong year overall, with the S&P GSCI total return index up some 6%. Behind the headline number, the near Brent Crude future has risen 18% year to date, a figure matched by the Bloomberg Base Metal index. Precious metals continued their staggering run into precarious territory, with gold 26% higher and silver up an astonishing 73%. One of the few fallers was a significant one for the index, however: the NYMEX natural gas future is down 26% on the year.

Finally, in the world of currencies, the big loser was the euro, down over 9% on a trade weighted basis year to date. The major gainers were the safe havens of the yen (up 13.4%) and the Swiss franc (up 12.8%), and the Australian dollar got an 8% boost from the commodity boom. Both sterling and the US dollar are broadly flat.

There are a number of observations that could be made on all of this, and even some hints to be drawn about the future. For now, however, we will limit ourselves to noting the disparity of returns between and within asset classes, underlining the portfolio contribution to be made from decision making at this level. And as to the future, may we wish you a merry Christmas, and a happy and prosperous new year.

20/12/2010 at 2:52 pm

Cottoning On

The textile industry in Britain is not what it once was, so UK observers can be forgiven for making relatively little of the news that the cotton price is on the verge of posting its biggest annual increase since 1973.

Behind the rise is burgeoning demand from China. Now the Chinese have dominated the textile market for years, as they have done so much of the manufacturing sector. In fact, cheap Chinese clothing imports could be relied on to exert deflationary pressure on the UK for the whole of the last decade: the clothing and footwear component of the RPI fell by an average 2.9% per annum over 2000-2009.

Not any more. Last month, the price of clothes and shoes in Britain had risen by 9.2% on the year, just shy of the 9.4% annual rise posted in October – the highest rises in 30 years. Although clothing and footwear accounts for only 4% of the RPI “basket”, the scale of these increases means it made up 0.4% of the 4.5% rise across the index as a whole.

What has changed is that the Chinese are no longer just a nation of export manufacturers; domestic demand has added massively to the pressure on world commodity supply. (The robustness of the domestic economy was behind the surprising mildness of the Chinese slowdown over 2008-9 amid the frenzied collapse of its export markets.)

Chinese demand for construction materials, and raw materials in general, has been an established feature of the commodities landscape for the last few years. But the upward pressure on cotton is new.

What other price pressures will emerge as the populous economies of Asia continue to develop? And how serious will the effect be on the price of goods here at home?

All we can say for now is that such pressures are unlikely to abate as the rest of the world recovers from recession. And phrases such as “biggest annual increase since 1973” are frankly chilling in an inflationary context.

The job of our central banks never seems to get any easier ..

03/12/2010 at 10:45 am


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