Schroder Monthly Market Review and Outlook

February 2009 Team Monthly Market Review & Outlook

There was no January effect to be found other than a negative one as risk aversion continued to weigh heavily on equity markets, despite credit spreads tightening somewhat. A continued monetary easing stance globally together with more fiscal stimulus plans & massive bailouts of financials seemed to serve only as a reminder of the gravity of the crisis. The second half of the month saw a new wave of downright capitulation from financials as earnings season kicked off to dismal bottom line data.

Bonds down across the board on historically-low yields and extreme inflation of public balance sheets. Asian yields generally higher despite more accommodative monetary policies to alleviate growth slowdown. Credit negative on more deleveraging ahead & credit crunch/muted consumption double whammy.

USD up on relative outperformance to G10 currencies. Asian currencies to suffer from USD resilience, differentiation on basis of fiscal & external debt position.

Oil -6.5% to $41.7/bbl on recession & high inventories outweighing talks of further OPEC supply cuts.
Gold +5.2% to $928/oz despite greenback strength on renewed safe haven attributes.
1257 -7.3% -7.3%

Equity
There was no January effect to be found other than a negative one as risk aversion continued to weigh heavily on equity markets, despite credit spreads tightening somewhat. A continued monetary easing stance globally (albeit at a somewhat slower pace than in December) together with more fiscal stimulus plans & massive bailouts of financials seemed to serve only as a reminder of the gravity of the crisis. The
second half of the month saw a new wave of downright capitulation from financials as earnings season kicked off to dismal bottom line data.
MSCI AC World -8.6%, US -8.6%, EU -4.8%, Japan -9.8%, Asia ex-JP -5.6%, EM -6.6%
US – Nasdaq -6.4%, S&P500 -8.6%, Dow -8.8% on macro headwinds, bailouts & dismal earnings
EU – UK -6.4%, France -7.6%, Germany -9.8% on negative earnings & gripping recession
EM – Brazil +4.7% on materials tailwinds, Russia -15.3% on energy headwinds & currency devaluation
Asia – China-A +9.3% on domestic fiscal stimulus, China-H -9.6% on GDP slowdown & export headwinds
Healthcare -3.8% on defensive attributes ; Financials -19.2% on government bailouts & reported losses

Fixed Income
Bonds down (prices down, yields up) across the board on historically-low yields and extreme inflation of public balance sheets ; 10-year yields for US +63bp, EU +35bp, UK +68bp, JP +12bp, AU +11bp Asian yields generally higher despite more accommodative monetary policies to alleviate growth slowdown ; India +99bp, Thailand +81bp, Korea +49bp, Hong Kong +45bp, Taiwan +12bp, Philippines +6bp, Singapore +2bp ; but Indonesia -10bp, Malaysia -11bp, Vietnam -115bp ECB cut 50bp to 2%, BoE cut 50bp to 1.5%, Canada cut 50bp to 1%, New Zealand cut 150bp to 3.5%,India cut 100bp to 5.5%, Korea cut 50bp to 2.5%, Philippines cut 50bp to 5.5%, Indonesia cut 50bp to 8.75%, Taiwan cut 50bp to 1.5%, Thailand cut 75bp to 2%, Malaysia cut 75bp to 2.5%, Brazil cut 100bp to 12.75%

Currencies
US Dollar index +5.8% on relative outperformance to most G10 currencies ; Euro -8.3%, Canada -0.9%, Sterling -0.4%, Swiss -8%, Yen +0.8%, Ruble -17.7% on more rounds of devaluation.Most Asian currencies lost ground on USD strength ; Kiwi -12.2%, Aussie -9.3%, Korea -8.7%, Singapore -5.3%, Malaysia -3.9%, Taiwan -2.7%, Indonesia -2.2%, Thailand -0.7%, China -0.4%, India -0.1% ; but Vietnam flat & Philippines +1.2%

Commodity
Oil -6.5% to $41.7/bbl on recession & high inventories outweighing talks of further OPEC supply cuts
Gold +5.2% to $928/oz despite greenback strength on renewed safe haven attributes

Outlook
Equity
Investor sentiment to stay under pressure with more downside bias, volatility to remain at crisis-levels
US underweight on rising unemployment, higher savings rate & increasing defaults in consumer credit
EU underweight on consumption retrenchment, protracted credit crunch & dismal earnings outlook
JP underweight on currency headwinds & muted domestic consumption as unemployment rises
Russia underweight amid falling energy prices, currency devaluation & fast depleting forex reserves
LatAm underweight as Brazil hit by commodity correction and Mexico correlation to US growth cycle
Asia underweight on consumption failing to pick up the slack from falling exports, despite fiscal stimulus

Fixed Income
Credit negative on more deleveraging ahead & credit crunch/muted consumption double whammy
Fed on hold at 0-0.25% ; no more monetary bullets, fiscal stimulus & banks’ bailouts to take center stage
ECB to hold at 2.0% ; all indicators point at deflationary pressures & more severe economic downturn
BoE to hold at 1.5% ; weakening manufacturing & credit crunch overwhelm softening inflation
RBA to cut 100bp at 2.25% ; sharp rise in risk aversion as growth stalls & inflation well within target band

Currency
Fundamental analysis viewed on basis of relative economic performance & health of public finances
USD medium-term resilience on outperformance relative to G10 ex-Japan, but high liquidity a risk
Look for a pullback to add JPY positions on inflows to outweigh any potential BOJ market intervention
Asian currencies to suffer from USD resilience, differentiation on basis of fiscal & external debt position

Commodity
Oil support at 35, resistance at 50 ; to range-trade on high crude inventories & demand in refined products
Gold support at 830 ; USD resilience to balance safe haven attribute on renewed risk aversion