Economic Newsletter dated February 2010

Before we discuss the economic situation, we are proud to announce that AisaProfessional was considered by Money Marketing to be in the top 10 of advisers in the UK for both Best Small IFA & Best Retirement Planner 2010. This was undoubtedly due to our commitment to continuous improvement for our clients, and the way in which we have embraced technology, websites and the constructive method we communicate with our clients.

The views in this letter represent the opinions of Aisa and should not be construed as a statement of fact. Further advice should be sought before actioning any investment or tax advice. The Financial Services Authority does not regulate opinions on the economic outlook, nor does it regulate some forms of tax advice or comment.

Outline

The big question asked around the world, is have we put this financial crisis behind us? From our extensive research, it seems that there is strong sense of optimism, even if in some regions the consensus is that it will be a long and difficult journey. As we enter this new decade the focus is firmly on the recovery. Many economists have highlighted the rise of Aisa Pacific as the region best equipped to reap the benefits of the recovery. There is a growing recognition that there has been an increased influence from the East as a consequence of the crisis. Another important question is the impact of increased regulation which has been proposed, and enforced in some areas, since the crisis unfolded. There are many issues which should be taken into account when assessing the year ahead, but hopefully this document will help you consider the most important factors which affect you.

UK Economic Outlook

Over the past 18 months the UK has been trying to recover from a deep recession. Whilst we are told that the UK is officially out of recession, there are worries that we could be heading for what some would call a ‘double dip’, basically another severe drop in market value. There are concerns amongst many Economists that the recent post-March rally is nothing more than a cyclical rebound in a wider, structural Bear market. There is deep scepticism about the fact that companies are more profitable than expected, have recovered faster and have better margins coming out of a meltdown than they have ever done after any prior recession. This could be put down to Companies getting bad news out in 2008, thus making 2008 look worse than it was and resulting in 2009 looking much better! However, there have been drastic cuts in capacity and expenses, and with competition being reduced or even wiped out, the future for those companies who have survived may indeed be very profitable. At the same time interest rates are very low, and look likely to stay that way, so maybe there is hope for the economy in the short term. With public spending cuts and increased VAT and income tax very possible, it looks like a tough 2 years ahead for UK citizens, but whether this will be reflected in the stock market is another matter.

Equities

Stock markets are concerned with profits and shareholder value, and can behave very differently to the economy. For example in Europe we have seen strong stock market gains over the last decade, despite a modest (and in some years very poor) economic environment. However China, which has enjoyed a decade of economic growth close to 10% each year, only really saw its stock market begin to perform in the latter half of the decade. It could be a missed opportunity to write off the UK stock market. Those companies who have survived the recession have done so by reacting quickly and refinancing – so paying off debt, raising new money and cutting costs. Therefore some respected commentators believe corporate profits for the UK are likely to rise considerably this year, and although we have already seen a strong rally, it looks like further growth is a strong possibility. It is believed that over half the revenue of the top 350 UK firms comes from overseas, so it is wise to ensure that investments made in UK companies will benefit as the global economy improves, even if the UK does not follow suit. One major impact on these profits is the decline of the pound, which has mean’t overseas earnings are more valuable when converted into Sterling. Although the US has experienced many problems over the past 2 years, there is still great opportunity for good stock pickers. The States is brimming with first-rate global companies and although there are many challenges that face America in the near future, is still boasts a disproportionate share of the worlds most innovative and enterprising businesses. Despite robust government spending and increased exports leading to positive growth figures, the US still face similar formidable challenges to the UK; high consumer debt and government deficit. In contrast, the world’s less developed economies appear far better placed. With the rapid emergence of vast new middle classes in countries like Brazil, India and China, it would be wise to invest in companies who will benefit from this growing market. However, these companies may not be based in emerging markets, so careful analysis of strong firms with good cash flows, who market their products to the right regions, could prove beneficial to savvy investors. In recent weeks we have seen major equity markets suffer as the US administration proposed the largest reforms of banking regulation since the Great Depression and China sought to tighten monetary policy following higher-than-expected inflation and GDP growth. The markets’ reaction to the change in Chinese policy shows how sensitive and nervous they are about exit strategies while the global economy remains fragile. However, China retains an elevated target for lending during 2010, so while policymakers are keen to pre-empt potential inflationary pressures, they are likely to wait to see lenders’ response to this initial policy change before making further adjustments. In general, we believe returns are likely to vary according to the geographical sectors in which you are invested and the specific stock selection. Six months ago we considered passive investing, and looking back you would probably have been better off if you had invested in an index tracker compared to investment funds with high charges. However the next 12 months does not look predictable and it may be worth considering changing strategy, we believe there is a strong argument for trusting your money to a selection of experienced fund managers, in order to obtain consistent growth over the next 5 years. Assuming that you align yourselves with a competent investment strategist, we believe there is significant growth available in the equity market in the short to medium term.

Cash Held in Arrears – UK

We all know how interest rates have remained historically low for 2 years, but most people do not expect them to increase in the near future. There is general consensus that the base rate needs to remain low in order to help our economy to recover, and avoid further repossessions in the housing market. Consumers and the government alike will have to pay off debt, meaning reduced spending and curbed economic activity. It is hard to see why interest rates will need to rise in 2010 so depositors sitting and hoping for better returns from their bank accounts may be disappointed. The ‘risk’ of holding cash becomes accentuated when inflation rises quickly, which is a strong possibility over the next couple of years. Obviously an emergency cash deposit holding is always recommended, but after this need is covered there is still little point holding this asset class when Cash yields are close to zero. The argument for risk is starting to return. There are alternative cautious assets that could provide a higher return, such as structured products.

Structured Products

There has been a large amount of financial press concerning Structured Products and their suitability to clients. The concerns stem from whether these products are too expensive, in that clients should not waste money on the cost of guarantees, and whether the underlying counter party are strong enough to ensure the guarantee is paid if the company do not ‘fulfill their financial obligations’. However many clients do not trust the market enough to place the majority of their savings in equities, and would rather pay a premium to build a guarantee into their initial cash investment. The risk remains that the chosen company could collapse and the guarantee will not be honored, but surely these risks are minimal compared to many investment options. Indeed some structured products are deposit based accounts, covered by the Financial Services Compensation Scheme (FSCS) and therefore should protect up to £50,000 of your capital. Although these products may not be suitable for all clients, we believe they are valuable options for cautious clients who would like to further diversify and secure a percentage of their portfolio.

Property – Commercial & Residential

A recent report has concluded that the upturn in the commercial-property market is not based on fundamental improvements, and therefore likely to prove unsustainable. There is popular thought that investors are calling the bottom of the market and the massive decline in prices over the past couple of years have resulted in attractive buying opportunities. There are some bright spots; eg the weakness of the pound, and London's position as a strong international market for trophy assets. We have seen fixed rates increasing. Residential property will continue to be affected by unemployment and a ‘double dip’ in property value during 2010 would not be surprising. Low interest rates continue to create a false dawn of affordability. We still believe that property should not be a large holding within a balanced portfolio at the moment.

Fixed Interest

This asset class should be viewed with extreme caution at the moment. Fixed Interest takes into account Corporate and Government borrowing, but there is fast becoming an important divide between their potential performance over the short term. When the market experienced large losses in equity values, many clients moved vast sums of money into fixed interest funds, mostly weighted towards corporate bonds. However there is growing concern that these funds may be heavily weighted towards UK gilts or UK investment-grade bonds. Many believe there are potential issues with both due to the ending of quantitative easing and the issuance of £200bn of gilts. The market could move quickly and there is a fear that a lot of people are getting caught out by a spike in UK gilt yields and the subsequent capital loss. You only have to look at recent events in Greece to realise that international bond investors are pretty unforgiving and the UK may have to work hard to keep its coveted AAA status. It is a belief by some US commentators that there are very similar concerns over long-term US government bonds. Indeed you may see a ‘burst in the bond market bubble’ similar to that of the tech and housing bubbles over the past decade. Therefore, although competent Corporate Bonds may continue to offer good value, it may be wise to assess your exposure to government borrowing (UK Gilts and US treasury bonds).

Conclusion

As always there are many factors to consider when assessing the financial markets, but you need to assess what is most important to you. What are you trying to achieve now? Are you interested in making money or protecting your money? In our 2007 and 2008 newsletters we predicted that those of you purely in Equities or Property at that time were going to suffer increased volatility, possible high risks, and that you should speak with us then. Some people did and others did not! Remember that we combine our advice with the latest in tax planning, to prevent you losing more money to the taxman than you should. We have been making use of guaranteed and structured products recently, but where else can you look? Absolute funds are a popular choice, but which fund and how much should you invest? We believe that to keep one step ahead, it is a good time to structure your portfolio for growth, whether this is via structured products for those requiring a low risk approach or via an individualised portfolio for those more accepting of risk.

AisaProfessional advisers; providing high quality advice to benefit you!

Geordie Bulmer -- Senior Adviser

Notes …

Please note that the opinions expressed in this letter must not be construed as statements of fact – you should carry out your own further research before coming to a decision and before taking any action.

Dated 9 February 2010 – valid for 6 months. Aisa Direct Ltd, authorised and regulated by the FSA as Independent Financial Advisers. 1 Fordbrook Business Centre, Pewsey, SN9 5NU

* This newsletter has been prepared with all possible care to ensure its accuracy. It is based on our current understanding of legislation and HMRC practice.

* Neither Aisa Direct Ltd nor any of its employees can accept responsibility for any errors or omissions. You should seek further professional advice prior to action.

This should not be deemed as individual advice and you should seek further information particular to your individual circumstances. For further information, contact AisaProfessional on (0845) 838 7279.