RARE Infrastructure Value Fund Market Commentary – October 2009
October proved to be reasonably volatile in global equity markets with markets focused on sustainability of the economic outlook and strength of the 3rd quarter earnings. Until mid October the World markets (MSCI World, local) had enjoyed a rally providing total returns of 26%. World markets fell 2% in October, with Emerging Markets down 0.5%.
Markets were reasonably happy with the reporting season, with 74% of the S&P500 companies (323 companies) reporting by month end. Excluding financials, earnings were circa 7% higher than consensus; however revenues were 1% below expectations implying cost reductions are still driving earnings. Investors will want to see the US consumer return to support the present market and see it advance further.
On the economic front results were mixed which added to the volatility and divergence of views on the strength and sustainability of the recovery. There continued to be evidence of unprecedented synchronized global uprising with unemployment claims falling in the US, and outside the US employment is increasing in nine economies. Other news was more subdued, with US retail sales down (to be expected with “cash for clunkers” finishing) and falls in some consumer confidence surveys creating fears about the spending recovery. Corporate sector industrial production was strong and support RARE’s view that the inventory restocking is in full swing which should help support employment levels. Again our views on sustainability of the recovery hinge on US unemployment peaking and improving in the short term.
Overall we remain in the school that the economic uprising is on track, it may not be V or U shaped; and it may be below trend but it is moving up. The one factor that could be a worry, and a factor driving up markets, is the massive carry trade and continued liquidity arising from quantitative easing. By this we mean, investors secure in the knowledge the US will not raise rates in the foreseeable future, borrow in the US and invest offshore in risk or high yield/leveraged assets. This situation provides investors with massive gains, borrowing at negligible interest rates and obtaining significant currency gains as the US dollar falls. This can not continue for ever as the US will raise rates; but in the mean time the carry trade is on. This situation may remain for a while, but the longer it lasts the worse the potential problem is on a global basis.
