Investment Newsletter April 2013
Spring Loaded The past month has seen renewed volatility in the equity market. The FTSE 100 closed at 6,529 on 14 March, before slipping back as low as 6,249 on 5 April. By 11 April it had recovered somewhat to close at 6,416. Renewed volatility in global equities came from a number of sources, with the clumsily handled bailout of Cyprus a major factor. Disappointing jobs figures in the US also contributed, as did bird flu reports in China and tensions in Korea which particularly affected Asian markets. This is the first real bout of volatility we have seen in 2013, apart from a 100 point drop or so when Italy failed to elect a new government. However, markets have proved remarkably resilient. Away from the UK, both the S&P 500 in the US and the Nikkei in Japan have hit new record highs in the past few days. Stimulus from both the American and Japanese central banks has contributed as investors become more confident about these economies and the global economy in general. This stimulus is meaning we are seeing some slightly strange developments in markets. As expectations of economic recovery increase, we would normally see equities rise – as they have been - and government bonds fall. However, we are seeing government bonds in the US and UK actually rise in value, meaning the yields have dropped back towards the lows we saw last year. Another asset class that has outperformed in the past few years due to fears about the economy has been gold. However, 12 April saw one of the biggest ever one day drops in the gold price of over 5%. As I write it is priced at $1,413 per ounce, down around 25% from the highs of $1,900 per ounce in 2011. So which is right, the equity or the bond markets? Are gold investors right to be selling? Only time will tell. However, the continued quantitative easing and the new stimulus in Japan are certainly distorting markets. We suspect that the global economy will continue to slowly improve, driven particularly by the US. This could help push equities higher, but we do not expect a corresponding sell off in bonds. Instead, we think government bonds could drift along, making no real gains or losses, perhaps with yields rising slowly over time.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Investment Newsletter | April 2013
Portfolio Changes We have made a number of changes to portfolios over the past month. Firstly, we sold the M&G Optimal Income fund within our fixed interest portfolio and topped up the M&G UK Inflation Linked Bond and the TwentyFour Dynamic Bond funds we already held. We have some concerns about inflation and believe these funds will do better to protect portfolios than the M&G Optimal Income fund. We are also in the process of taking profits on the Barclays Defined Return product that most clients bought in November. This product will produce a 10% return should the FTSE be above 5,767 on 12 November 2013. One benefit of these products is that they can be bought or sold at any time, we don’t have to wait for maturity. At the time of writing, the product had already gained 8% over 5 months and so will only gain another 2% if we hold it for the remaining 7 months. We are typically switching into a commercial property fund, SWIP UK Property Trust. We believe the commercial property market could pick up later in the year and, whilst we may be re-entering at quite an early stage, we are hopeful that this fund will outperform the Barclays product over its remaining term whilst reducing equity exposure in portfolios. Finally, we are also topping up Japanese equity by adding to holdings in the Schroder Tokyo fund and reducing UK equity. We believe the prospects for Japanese companies have improved following the recent stimulus and the reduction in the value of the Yen.
Equinox This newsletter is a short one as our half yearly magazine Equinox will be issued shortly. This edition features the usual mix of articles, fund manager features, and a review of market and investment performance over the last 6 months. We hope you enjoy it and welcome your feedback.
Mike Deverell
Investment Manager
Time to Invest
Equilibrium Asset Management LLP Brooke Court Lower Meadow Road Handforth Dean Wilmslow Cheshire SK9 3ND United Kingdom Visit us at www.eqasset.co.uk t : +44 (0)161 486 2250 f : +44 (0)161 488 4598 e : askus@eqasset.co.uk Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Market Views | April 2013
General Economic Overview The global economy has generally picked up, with emerging markets Japan and the US doing much better. Challenges remain, particularly in Europe and the UK. Inflation remains high and we are concerned that it could move significantly higher. Interest rates are unlikely to rise for some time, and more quantitative easing is possible in the UK.
Asset class key + positive - negative = neutral (normal behaviour)
+5 -5
strongly positive strongly negative
Equity Markets We remain positive taking an 18 month view, based on company valuations. After a slight dip in markets we have increased our score from neutral to +1. We are more positive towards emerging markets and Japan. Fixed Interest After a strong run in corporate bonds we believe returns will tail off. We are avoiding conventional Gilts whose values have been inflated. We have increased exposure to inflation linked bonds.
Outlook
+1 -3
Commercial Property Commercial property prices have been falling over the past 12 months or so but this appears to have slowed. The rental yield remains potentially attractive and as the economy picks up we have recently re-entered this asset class.
-4
Residential Property
-5
We believe prices are likely to remain largely flat over 18 months. Cash With interest rates remaining at record lows, returns on cash could remain below average for some time. Balanced Asset Allocation For a typical balanced portfolio we are overweight equity and alternative equity, neutral fixed interest and hold 3% to 5% property. A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5% means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall.
These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser.
-5