Market Report January 2009

Not only did 2008 bring us abysmal investment market performance, it also brought us Banking failures (Lehman Brothers and others); corporate failures (Woolworths, Adams and others); and to cap it all, it bought the World’s biggest fraud, when the Bernard Madoff scam was unearthed in the United States, with an alleged $50 Billion price tag.

The economic historian Charles Kindleberger is quoted as saying, "swindling is demand determined, following Keynes’ Law that determines its own supply, rather than Say’s Law, that supply creates its own demand. In a boom, fortunes are made, individuals wax greedy, and swindlers come forward to exploit that greed."

In 2008, the fragile economies of the World, built upon the credit bubble of the last 15 years, finally gave way, and in such an environment, asset prices cannot stay buoyant.

We are however very pleased to report to you that every single client portfolio managed by iFunds Asset Management, (excluding tax specific AIM portfolios) has outperformed the APCIMS and major World indices during 2008. This has been down to the ability of the iFunds Managers to defend capital during the year by being able to disinvest assets, and utilise cash deposits, as a legitimate and cost effective defensive strategy. By not having to chase returns, the overall performance of the iFunds portfolios have been considerably enhanced by the low cost structures and the Exchange Traded Fund investments used within the funds themselves.

These low cost structures, without commission or stamp duty payable on transactions, will also ensure outperformance if markets rally during 2009.

The ability to further create tax efficient income for clients from total return investment strategies, also means that ongoing, the income returns to clients, if required, will not be affected by the cutting or non payment of equity dividends we will see during 2009. This will severely affect "long only" equity investment managers who rely on dividend accrual to provide client income requirements.

THE FUTURE.
So, what of 2009, is there hope?

Well, as sure as for every bubble, there is a bust; so, following every bust is a recovery. But the Global financial crisis; the Mumbai massacre - targeting symbols of Indian power and opulence (the Twin Towers in New York), and the near collapse of capitalism shows a far from linear path from which to predict the events of 2009, and looking into the crystal ball does not look too promising.

Confidence has taken a big bashing and will take some recovering. However lessons will have been learned. The consumer, who has lived beyond their means, supported by rising house prices; easy credit; and bulging credit card debt, is after all a rational beast who has survived the Dot-Com boom; 9/11; soaring petrol prices and a near collapse of the World’s financial system.

The consumer will return, as they always have done, albeit in a smaller more controlled way; and the beast will re-appear once job security becomes something more than tenuous.

Similarly, the Banks will start lending again, probably after another £50 Billion of Government capital (i.e. our money) has been injected into the system. Property prices will recover as well, and the World will seem an "OK" place once more.

The slight problem is that none of this will happen in 2009! It may happen bit by bit in 2010, and be in place in 2011. But, sorry to say, 2009 will not be a good year, as Corporate failures will continue, and the jobless total will probably reach circa 3 million.

Confidence of markets is hard to earn and easy to lose, and bubbles pop very easily, and the most valuable thing we can take out of 2008 is that very lesson. Once shattered, confidence takes a great deal of time to put back together, and a great deal of trust. Once confidence is restored, the Global economy will find its footing, and the World’s financial markets will have found their bottom.

We will then see liquidity return to the system, as the banks regain their confidence to lend again, and asset prices, including houses, will rise again in value. Be patient, capitalism is dead - long live capitalism!

Pandora opened her box in 2008 and the World received all manner of ills. As a result of which the World is now a different place. The speed of communication and as a consequence, investment markets, means that good things come and go within the blink of an eye, and today’s headlines are very quickly tomorrow’s fish and chip paper.

In this modern internet era, change is the norm, and we must accept and adapt to the changes that are coming, only that way can we look forward sooner rather than later to the eventual recovery.