The second quarter of 2005 proved to be a typical investment mid-cycle affair. Specific events dominated investor thinking, but the underlyi...

The second quarter of 2005 proved to be a typical investment mid-cycle affair. Specific events dominated investor thinking, but the underlying economic picture remained quite sanguine. Investors were thrown a little off course early in the quarter by some disappointing earnings results, especially from US companies, despite the fact that this was quickly followed by some very upbeat earnings statements, a bout of nervousness prevailed. This was exacerbated in May when both General Motors and Ford debt was downgrade to "junk" status. This had the effect of making bond investors very nervous and probably quite perplexed that such "quality" names were cast into the mire. This mood did not prevail for long, as proper inspection of the companies' balance sheets indicated that the new ratings were fairer than first thought. Nevertheless, many of the investors in the credit markets took substantial and well published hits, which added to the gloom. Meanwhile, the US dollar continued its recovery, as investors saw US interest rates become more competitive, and US economic performance seemed to be more robust than its European and Japanese counterparts. The end of the quarter saw a marked recovery in confidence in the stock and credit markets, which has carried through to July. The move was stilted on the last day of the quarter by the rise in US interest rates, but a more positive mood has emerged. The principal reason for this is that the outlook for corporate profits in the US and the Far East, ex Japan, remains quite satisfactory. Furthermore, there is a general feeling that interest rate rises in the US are peaking. Given the growth in dividends this year, the investor is likely to be enticed by reasonable stock valuations and dividend growth. It is a typical mid-cycle phenomenon, where very specific stock advances take place. We are, of course, mindful that global terrorist outrages and spikes in the price of energy will test these more optimistic assertions. 2005 has also seen the predicted advance in merger and acquisition activity. Corporate cash had built up in many cases to excessive levels, and shareholders are naturally keen to see this money put to work. The successful application of these monies is what normally propels the investment cycle to a further growth stage. It is too early to forecast a global advance in economic activity but the signs outside Europe and Japan are most encouraging. This is usually a time when a broad range of investment strategies works well, managers within those strategies should be able to eke out solid returns as the base proposition of their investment proposition remains very much intact. While the summers has become pollinated with investor reluctance, we should anticipate "events", which if they shake the markets into a downbeat reflective mood, would serve as good buying opportunities for continuing progress of the investment cycle.