The nine day fall in the FTSE100 finally broke on 15th December but surprisingly the natural resource stocks that had led the market lower, continued to lag during the subsequent bounce. This is odd and cannot bode well for the sector. The world has spent a long time adjusting to disinflation, it may take time to now adjust to zero inflation. There is excess supply of too many goods and demand is only expanding at a pedestrian rate. Prices will continue to come under pressure across swathes of industries as a result. Companies are hardwired into expecting price inflation in their planning and forecasts, and this will have to change. It is said that science progresses one funeral at a time and while businessmen don’t enjoy the tenured lifestyle of academics, this is an adjustment that is likely to take years.

Across the broad asset classes, valuations seem about right but there will be opportunities for the nimble and quick witted to identify shortages and pinch points in the global supply chain. The technological revolution continues apace and new developments will throw up opportunities for individual companies and occasionally, entire sub-sectors of industry. Identifying these from our vantage point is difficult but we recognise that they exist. We need to identify experienced fund managers who have a record of ferreting out such opportunities. Fortunately, this is Square Mile’s raison d'être.

We highlighted in last quarter’s policy meeting that opportunities in high yield bonds were building. Recent price moves have made them even more attractive. Clearly there is a need to be highly selective but the opportunities here are now great enough to make it worthwhile to moderate our bias towards equities in favour of this asset class. The transfer in risk budget means that we can be less concerned about the high correlation between the two asset classes.

We still have a preference for the USD. Higher interest rates should drive the dollar higher notwithstanding the current account trends. Europe may be doing a little better but this is not because they are doing things right, merely, they are doing things a little less badly. Discontent within the populous is growing, and the recent elections in France demonstrate how far this has come. The National Front may not yet be considered a realistic option for government but to take over a quarter of the vote underlines the depth of feeling in a nation that is at the centre of the EU.

We are at the stage of the cycle where we should be beginning to worry about property. Returns over the last two years have been very strong and there has been much interest in the sector. On the other hand, there has been an explosion in job creation in the UK and there is a clear shortage of space in the SE. Rents are climbing and we believe this cycle will be an extended one. Many investors draw comfort from the physical aspects of owning property which has been reinforced by the 30 year bull market in residential property. In our policy pack, we have introduced a number of indicators to monitor liquidity in the asset class. None of these indicators currently give cause for concern and we continue to favour the sector.