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Weekly Update 10 August 2012

If markets could only follow the Olympic spirit that currently pervades London we might see a reflection between value and perception, something that still evades most asset classes at the moment. Let us start with European Bond prices, in particular those of Spain and Italy which yet again saw a significant spike last week well beyond the 7% “point of no return”. Is this price deserved? Perhaps not, however it was not helped by rumours of Spanish officials privately talking about seeking a €300 billion bail out. The problem is that we seem to be stuck in some sort of Euro policy ground hog day type scenario, the difference being that as each economic crisis re-occurs the policy makers make the same reactive mistakes as opposed to learning and adjusting. Until this cycle is broken, we see the Euro as an unsafe bet and I would expect to see it drop on both the sterling and the dollar in the medium term.

In the UK data continued to be weak with a variety of innocuous events being blamed, from Jubilee weekends to the dismal British summer. We expect another rate cut this year and would be surprised if it didn’t come sooner rather than later and yet again we are hearing sabre rattling from the Bank of England over the amount of loans being dished out to SME’s, designed to stimulate economic growth at a more grass roots level, the traditional path out of any recession. As such we are once again looking at stocks and funds that specialize in this section of the economy, for those with a medium to long term buy and hold strategy we feel confident that this will deliver returns.

Meanwhile in the US the bullish attitude seems to be hanging on, validating our stock picks last month and offering a comfortable short term profit taking opportunity, always a satisfying moment to say “I told you so”. With important pay roll numbers coming out this week we remain confident on US exposure and feel that there is a plethora of undervalued assets still available. Given what US deposits are earning we’d encourage those with the appetite to consider getting back into the market now more than ever.

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