July, 2010 Global Financial Market Perspective
By Andrew Mehalko, CFA, Chief Investment Officer

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Second Quarter Highlights

• Market sentiment turned from bullish to bearish.
• Sovereign debt concerns in Europe caused a retreat from risk assets, prompting a decline in equity markets.
• Bonds, gold, global trading, and multi-strategy hedge funds performed well on a relative basis.
• Globally, economic growth slowed, dampening the prospect of a V-shaped recovery.

Global Financial Markets: A Change of Heart

The second quarter of 2010 performed in direct contrast to the first quarter of the year. In the first quarter, global financial markets focused on the hope of a V-shaped recovery and investors traded into risk assets with hopeful enthusiasm. In the second quarter, however, investors swiftly shifted their focus to worries of sovereign defaults, slower global economic growth, fiscal constraints, financial regulation, and another potential housing decline in the United States. The quarter ended with a downward revision of expected growth in China; the failure of the European Central Bank to auction fixed-term deposits at the expected low rates; a downbeat statement from the U.S. Federal Open Market Committee; and a downward revision of U.S. first quarter GDP growth. Global market performance was affected by several key events (including the Goldman Sachs fraud case and the BP oil spill), but European sovereign debt crisis stood at the forefront of investor concerns. Developed economies in the Euro area account for 15% of worldwide GDP¹; certainly, a slowdown or potential double-dip would be felt in other markets.

In light of the many economic challenges currently facing the world, GenSpring has consistently recommended that families position their portfolios relatively conservatively. The economic challenges we have discussed in previous communications as the basis for our advice are coming into focus and caution remains the watchword. We must continue to realistically and unemotionally assess the possible economic outcomes ahead and consider family goals and objectives when making investment decisions.

World Recovery: The Need for Robust Private Demand and Available Credit

During the second quarter, European leadership shifted from a stimulus-oriented mindset to a belt-tightening mindset; the United States continues to advocate a spendto- stimulate-growth approach. Governments that are running high deficits and facing slowing economies find themselves in a dilemma. If the stimulus is removed too early and austerity measures are too severe, economies risk a double-dip recession. On the other hand, if further stimulus is put in place, investors may lose confidence in the economy’s ability to recover without government spending. This can trigger a flight to quality and the debasement of currencies and risk assets. The catalyst for sustainable, robust recovery is the return of vibrant investment and consumption by both companies and individuals to fill the void left by the removal of government stimulus programs and lower credit availability from banks. While U.S. companies are holding significant amounts of cash and paying down debt, consumer confidence is beginning to wane again, retail sales data is coming in weaker than expected, and overall consumer credit outstanding is decreasing. All of these factors indicate that consumers are unlikely to fill the aforementioned void, at least in the near term.

¹ European Central Bank.