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Review
Despite the Fed's and BoE's intervention, LIBOR rates continued to rise and the money markets froze, suggesting that banks are still unwilling to lend even to each other, and are waiting to see what further proposals are going to emerge from the US Government, as it seems to change by the minute. The rescue plan recently took another turn when it was announced that if, after five years, losses were incurred by the government on the sale of the troubled assets it purchases through the $700 bn rescue programme, the US president would have to present a plan to recover the money from those who benefited from it. This is the result of anger from taxpayers at having to rescue Wall Street and naturally two months prior to an election both Republicans and Democrats want to take credit for the change and appease the electorate. At the time of writing, the House has voted against the proposal and the markets have reacted badly.

Outlook
Despite what's left of its safe haven and reserve currency status, the US dollar is likely to suffer long term from the rapid printing of new money to deal with the credit quake and the strains this is putting on the nation's balance sheet. How long will the USA retain its AAA rating? The same is likely to be true for sterling which doesn't seem to be trading at fair value yet despite having fallen significantly over the last year. As the largest US savings and loans bank, Washington Mutual sold its assets, investors sought safety in the low yielding yen, causing it to rise against the dollar, sterling and euro. There is the expectation that despite a deteriorating trade balance that the yen will weaken as the investment income surplus out weighs the trade balance. The low yielding Swiss franc is also a safe haven for investors during turbulent times and is likely to gain against the major currencies.

Review
Bond markets are as confused as everyone else. As panic increases about the credit crisis, investors seek a safe haven and worry about economic slowdown (which usually drives yields lower); but these concerns are being eclipsed by concerns over the prospects for increased issuance. Yields could fall in the short term if markets become more convinced that interest rates will fall in the UK and Euro zone next year. Medium term bonds are not good value but yields could rise by the middle of next year if the outlook for growth improves.

Outlook
There is expectation that the US budget deficit could reach $1000bn in the new fiscal year (October). While the figure varies depending on the source, there is no dispute that funding requirements for the next two years are significant; and while new issuances/auctions can raise a certain amount of income for the Government, it is not going to amount to anything close to the funding gap. Bond traders in the US are predicting that 3 year and 7 year issuance along with increased auctions of 30 year debt could be on the horizon. Ultimately it will be a balancing act. Higher rates will attract US investors as foreign investors retreat, maintaining pressure on long-dated yields, which will adversely affect rates for home loans. Conversely a steep yield curve would help banks repair their battered balance sheets.

Review
Extremely erratic is probably the best way of describing equity markets in recent weeks. The most turbulent weeks in decades saw markets such as Russia closing for 2 days to halt panic then increasing by 28.7%. European stock markets saw their biggest ever one day gain. Yesterday the Dow Jones experienced its biggest ever one-day points fall. It seems the only thing that is certain, is that nothing is certain. The US rescue package (if it can be revived) will hopefully create some stability in markets; but economies are still struggling and a return to normality seems unlikely in the short term. Investor confidence remains fragile.

Outlook
Volatility in equities is likely to continue for as long as the financial system remains unstable. Equities do look cheap by some measures, but earnings downgrades for 2009 are a serious concern. Any further bad news, particularly for financials, will continue to unsettle equities as will inflation worries or signs that economic growth will deteriorate further than expected. By the middle of next year, if the outlook shows signs of improving, equities are likely to stage a recovery as stock markets always show signs of recovery before the general economy.

Review
The last few months saw UK house builders experience a rally in their share prices. While they are still a long way off the highs seen during the housing boom there has been some recovery since the summer lows. That said the housing market globally is not out of the woods by any means. There is likely to be much more negative news to come. Currently share prices have recovered in property stocks mainly as a sign of relief that companies didn't go into bankruptcy, the majority of valuations still aren't low enough to make them a strong buying signal.

Outlook
With banks being likely to scale down their exposure to real estate going forward there is more scope for mutual funds, equity rich property investors and sovereign wealth funds to potentially acquire some bargains. Investment into real estate is likely to be much more selective going forward and at present a lot of investors are still sitting in cash waiting for further falls before committing themselves. The commercial sector in particularly has been hit hard during recent months as the market for securitized commercial mortgages has frozen and is not predicted to show signs of recovery until 2011. Most of the US housing market, the epicentre of the credit quake, is unlikely to start recovering until 2010 at the earliest.

Review
Gold has recently been the beneficiary of uncertainty as investors sought secure assets amid the turmoil, to the extent that the US Government suspended sales of the American Buffalo one-ounce bullion coin after retail investors depleted stocks. Commodity markets have recently been under pressure as hedge funds have been forced to reduce positions after banks cut their lines of credit. Oil facilities in the US have come under pressure from militant Nigerians causing disruption in the Gulf of Mexico to hurricanes which closed almost a third of the US's refining capacity.

Outlook
Demand for commodities from emerging economies is currently very strong and so far appears to be resilient despite high prices, which suggests confidence for the future. Merrill Lynch have commented that given the limited growth in supply across most markets oil, gold and grain prices will have to increase substantially in coming years to stem the healthy demand growth from emerging economies. Commodities will continue to have little or negative correlation with other asset classes and consequently over the longer term will increase the risk adjusted returns of a diversified portfolio. We continue to recommend gold for all investors who can stomach its volatility.

Review
Long/Short hedge funds have received a lot of bad press recently as a number of regulators have launched temporary bans on short selling with a view to restoring calm to the markets. It's been a difficult year for hedge funds with a number of them posting their worst returns for 10 years as they struggle to trade due to a lack of liquidity. A number of hedge funds have disappeared from the market and the expectation is that more closures will follow.

Outlook
UBP the world's largest allocator to hedge funds predicts that between 33% and 40% of hedge funds will run out of funding and access to leverage. There is a consensus amongst the more credible managers that a lot of new entrants to the market are somewhat ‘second rate' and it's a case of survival of the fittest. They also predict that the levels and extent of leverage in the future will be very different to what's been experienced over the last few years but that does not mean that opportunities do not exist. We continue to believe that well-managed funds of hedge funds can play a useful role in diversifying risk and reducing volatility in a portfolio.

Overall, we believe that the fourth quarter is going to be difficult for the markets, with widely falling asset prices and a weaker dollar. Some stability and good opportunities for long-term investors are likely to emerge in 2009, but careful asset allocation will remain key to success.

Please make sure you understand the risks associated with the investments you have made, and keep in close touch with your adviser.

If you would like more information on this topic please contact us.

This commentary should not be seen as a recommendation or solicitation to invest. Anyone considering investing should first seek advice specific and appropriate for their own needs, objectives and risk appetite.