NORMALLY, I would start with some positive news, for example that the FTSE 100 is still up around 10 per cent or that UK growth has been revised up, but in order to be positive you have to tackle the negatives, writes Anthony Platts.

The major negative I have been banging on about this year though is the prospect of higher interest rates some time in the future. Whenever this comes, albeit not soon, this will be welcome news for cash deposit savers. For borrowers, this will not be good news.

The attraction of bonds diminishes as interest rates rise. The yields on bonds have risen, meaning the capital values have fallen. The worst offenders this year have been emerging market bonds or developing market bonds, many of which are showing losses year-to-date. This raises questions over these investments being labelled lower risk.

The herd element a year ago were attracted to higher yields available over developed market equivalents, perhaps without fully considering currency factors and valuations. The question at all times should be is the potential return appropriate for the accepted risk. Alternatively is the risk appropriate for the accepted potential return.

The negative of the US Federal Reserve tapering its bond buying is thought to have been factored into the market by now, as this is not new news. With this factor now discounted, the phenomenon of good news being seen as bad is no longer the case and finally good news is seen as good news.

Economic improvements remain mixed but the major markets of the US and UK are in an upward trend. Japan continues to create debate and the latest indicators in China have been positive, although not entirely trusted.

UK growth for the second quarter of 2013 has been revised up from 0.6% to 0.7%. This is the same as and as good as Germany and higher than that recorded in the US in the same period.

Interest rates are important as a discounting factor when considering equity or share market valuations. The major source of share valuation is the discounted value of future dividend payments converted to a present value. This includes shares which may not currently be paying a dividend but are expected to in the future, and have been amongst the best performing stocks this year.

The Bank of England recently provided forward guidance for UK interest rates, creating a link to unemployment rates. The forecast implied interest rates would remain low until 2016. Even if the link is triggered earlier, say 2015, this still leaves two years of continued low interest rates.

For the short-term then respectable investment returns are expected to be provided by those investments for which low interest rates are a good thing.

From the stock market rally of March 2009, it has become the norm to have a summer crisis slump, usually centred on European sovereign debt. In 2010, this was in June, 2011 was August and last year was May/June. Greece is running out of money again but we appear to have had this year’s wobble already in June, followed by a quick rebound in July.

The positives are beating the negatives.

Anthony Platts is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Divisional Director in the Teesside office of Brewin Dolphin, and can be contacted on 01642 608855.

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