As Gilt Yields Fall to Historic Lows we ask “has a bubble is formed in the Sovereign Debt Markets?”
Each piece of positive economic data released seems to be followed by two negative ones leaving financial analysts and investors scratching their heads as to the underlying health of any economic recovery and thus the direction of financial markets. As a consequence equity market volatility has risen even though markets remain range-bound, moving higher or lower depending upon last news or data release. Indeed having scaled recent heights of 5,800 and plumbed the depths of 4,900, the FTSE 100 index is now only just above where it started for the year. One asset class that has benefitted from this uncertainty however has been the Government Bond Markets, both in the UK and overseas. Herein, we discuss why, and should, investors now be wary of that market. .

Should Governments be cutting budget deficits or stimulating the economy?
First we had the “PIGS” followed by “PIIGS”, then as Hungary announced that they could suffer from a Greek-style credit crisis (a claim that appears to be more about political scare mongering than fact) we had the “PHIIGS”; will it soon be all the weak economies and be “Supercalifragilisticexpialidocious”? A difficult question to answer but one which is causing much of the volatility we are experiencing in the global financial markets. With such uncertainty and no long-term confidence as to whether we are in a rising or falling market, the direction appears dictated by the latest news or data released on a day by day basis. .

Not this year?.
The Greek debt crisis is unfolding with predictable contagion to the Stock and Bond markets of the other three horsemen which we highlighted in our February Investment Note “Spain, Greece, Italy and Portugal – The Four Horsemen of the Apocalypse?”. The uncertainty has now spread to global stock markets and the familiar headline currently doing the rounds is “Sell in May and go away”, the full version of which adds “stay away till St. Leger Day”.

Could the Greek crisis threaten the euro zone?
A wave of risk aversion is, in the short term, sweeping the global financial markets, sparked by further concerns over the viability of a European aid package to the Greek Government. Fears that the issues in Greece may spill over to the rest of Europe’s debt-ridden countries, has weakened the Euro and threatens to derail a still fragile global economic recovery.

Consistency and Transparency.
Over the recent months, IOAM has been striving to refresh its portfolio offering to increase the transparency of our products and enhance information delivery, in line with the regulatory principles related to “Treating Customers Fairly”. This has resulted in a review of our existing portfolio type names, benchmarks and quarterly fact sheets which, we believe, enhances information delivery to ensure that product and portfolio offerings are clear, concise and more readily understandable. These changes are set out in detail below.

One year of feast and seven of famine?
Throughout 2008, we held overweight positions in UK Government Debt (or “Gilts”) for our sterling based clients – it was the only safe haven in a ferociously volatile market. However, our June 2009 Investment Note, “Gilts Face Mounting Headwinds”, highlighted some of the issues which we thought would create obstacles for Gilts during the remainder of the year and into 2010. Record low interest rates and substantial quantitative easing efforts (which could not last forever) led us to conclude that Gilts, at that point even, were showing signs that they had run their course.

Sovereign debt issues throughout Europe are hindering markets.
Global equity markets started the year well, initially posting solid gains and moving stronger. However despite a better than expected fourth-quarter earnings season, risk-aversion has returned pushing markets back into negative territory for the year driven most prominently by the sovereign debt issues that are now befalling the southern states of Europe.

A year of Specific Opportunities
"Bull Markets climb walls of worry but we must not ignore the obstacles still ahead"-Phillip Hadley, IOAM Managing Director.
We believe that 2010 will offer strong opportunities for those able to navigate the obstacles ahead and has the potential to be another rewarding year for investors.

Were we right or were we wrong?
We would like to take this opportunity to review our ad hoc Investment Notes presented in 2009 and critically assess whether we were right or wrong, where appropriate.
We give a summary below of each note, together with our views on how accurate we believe the note turned out to be and the bearing each had on our portfolio positioning.We would like to start with a reminder of our “Outlook for 2009” document below which was published in January 2009. We will leave it you to judge how accurate the predictions on this first page were.

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