Market update - March 2011
On the domestic equity front, we have spent much of our time over the last month engaged in one-on-one meetings with the management of companies in which we have vested interest. The February reporting season did not throw up a lot of surprises with most results well-flagged prior to the earnings announcement. However, looking at the composition of the results and hearing first hand from management has given us more confidence in some specific themes in the market playing out as we expected. For example, increased levels of investment and capital expenditure on resource projects are coming through strongly and tangibly in the numbers of the mining service providers. The management teams of the companies in this sector have been universally bullish about the number of new projects coming through. We have observed a shift in the dynamic between service providers and mining companies, whereby the sheer capacity of work to do has relieved pricing pressure on the service providers.
Developed Global equity markets have had a strong run lately buoyed by stronger earnings and a good run of positive economic data reassuring investors that the recovery is on track. Latterly however, risk appetite has been tempered with escalating issues in the Middle East, broad concerns about inflation and continuing European debt problems. On the upside, company fundamentals remain strong, and as long as the recovery continues in the U.S, companies appear to be more willing to start putting their capital to use in the form of additional investment, capital expenditure and even corporate activity, which is in contrast to 2009 and 2010.
Notwithstanding European sovereign debt issues where further spread widening is not unlikely in the peripheral countries, valuations remains tight which limits further upside in sovereign bonds.