It’s that time of year again for the second half of that old adage “Sell in May and go away, and don’t return until St Leger Day”. As the St Leger was run last Saturday, welcome back. If you haven’t been away then you probably would have had much more fun at Doncaster than watching the markets over the past few weeks. After all, what is watching a bunch of nervous and pampered animals chasing each other round in circles compared to going out for a good day’s horse racing?

From the 1st May until last week the main FTSE 100 Index has fallen by 3.5%, although most of that has occurred most recently in the past month. In fact from the beginning of the year, although we have had a rise in the first half, we have barely seen any headway at all and we are virtually back to where we started in January. So a good Summer holiday could have proved a more profitable (and a darn site more enjoyable) policy.

The FTSE 100 peak of this year was on 15th June when the index reached 6732 - which was still below the all time high achieved in late 1999 of 6930. Since June we have seen a decline back to the levels of March last year, or possibly more soberly, the levels achieved on13th October 1999! So a pure equity investment in the FTSE 100 for 8 years would have apparently achieved a zero gain. Well of course that is a little unfair, as one would have had dividends and corporate actions, and possibly adjusted your investment in the index during that time. However, it does underline that equity investment is no guarantee of returns.

Whilst mentioning the Millennium of 2000 which heralded the bear market which ran until March 2003, perhaps I should ignore the Ethiopian Millennium celebrations of last week and hope that does not have a similar relationship with today’s rather mephitic markets.

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Residential property has become for many one of the hedges against the vagaries of the equity market and I have come across some investors that will swear that property has never declined in value. However, a cursory glance back to the early 1990’s will reveal some significant pain, with many householders throwing back the keys in the midst of negative equity.

The growth of “buy to let” has benefited from the demand for housing of just about any type and especially as property prices have risen beyond the reach of many potential purchasers. However, many amateur landlords have gone into the market with significant mortgages in the hope that the rent will cover the cost. This can be a risky plan especially with rent “void” periods, bad tenants and upkeep costs. This situation is then made worse when mortgage rates start to rise and inevitably some landlords will be casualties, forcing sales at the wrong prices. As last week’s RICS house survey showed, the valuations across the nation appear to be turning down (with the exception of London for the moment). Being a forced seller in a falling market is not a good place to be. Also according to RICS the number of landlords selling has edged up to 6%. Whilst still at a low level this will be a key indicator to watch. Those landlords with significant equity value in their property can ride it out; for those who have not, then the future may be painful.

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Now here is a throw back from two decades ago – the possibility of local authorities issuing bonds again. The local authority bond market was once a vibrant area until stamped on by the financial disciplines of the Thatcher era. So the proposed offering of the uninspiringly named “Barnet Bond” (for the London Borough of Barnet) may be a sign of further issuances to come as local authorities try to find alternative ways of funding their developments.

The bond is proposed to be financed by the likes of car park levies and used for specific local issues such as housing development. Although the Treasury is unlikely to wish to see a huge development of such debt instruments, the ability to raise funds for specific needs may well prove attractive.

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You will have doubtless seen that Northern Rock has been bailed out by the Bank of England.  This good news as the Bank of England has stepped in as the “lender of the last resort” and will prevent any threat to depositors.  Unfortunately, there was never any threat to borrowers of losing their mortgages, so no free house for Christmas.

The powers that be judge “Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book”.  What went wrong then?  Perhaps it was a case of leaving its building society roots and flying too close to the sun.  Instead of taking deposits from savers and lending them on as mortgages, Northern Rock was aggressively growing its profits by obtaining nearly all (86%) of its funding in the money markets.  When those money markets caught a cold, Northern Rock got pneumonia.

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And finally…..some vital information for most males. How much are women likely to spend on handbags during the course of their lives? Apparently £8,000, consisting of a total of 111 such bags.

By way of sexual balance, British men apparently spend an unlikely £100 million combating their mid-life crises by spending on Viagra, hair weaves, Botox and Porches – the rest of course is just wasted.

One other issue that might be a timely warning for profligate investment bankers is news of the execution of a Chinese banker Mr Wen who was found guilty of embezzlement and captured on CCTV repaying huge loans and calling himself Mr Wu. Why? 

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management