Investment Newsletter December 2012
Crystal Clear? As 2012 draws to a close, thoughts inevitably turn to the year ahead. We thought we should dust off our crystal ball and share our predictions for 2013. As always, don’t hold us to them! Nobody can predict the future but here are some educated guesses for the main asset classes.
Equities to take off? We’ve said for a while that equities look undervalued based on company fundamentals. Over the past year we’ve seen some decent returns but the FTSE 100 is still below the 6,000 level. There are several reasons markets are not higher. It is not generally because companies are not doing well but because of “macro” economic concerns. Some of the main concerns for 2012 have been: • The Eurozone crisis • A slowdown in China • The US economy In our view, we could be about to reach a tipping point. One by one these concerns have receded. Europe finally reached a deal on Greece, Italy and Spain can now borrow at sensible levels, whilst there seems to be more of a consensus on how to move forward. Let’s hope Mr Berlusconi’s new bid for power doesn’t throw a spanner in the works! The data from China is pointing to a turnaround in their economy, and the dreaded “Hard Landing” looks to have been avoided. The US economy has done well this year but there are concerns over the “Fiscal Cliff”. We have written about this before and we are sure you are bored of hearing about it (we certainly are). However, we believe this cliff will become more like a gentle slope and the US economy can continue to grow. If this hurdle is removed, the last of the major barriers to markets moving ahead will have fallen away. Whilst risks still remain, the opportunities are immense.
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 | December 2012
Corporate bond returns to slow, gilts to fall? Corporate bonds have had a fantastic 2012. Whilst they still show some value relative to expensive gilts, after such a great run returns have to slow. We will be watching this asset class carefully, have already changed our fixed interest portfolio (see below), and may reduce exposure in 2013. Gilts have looked expensive for a long time, producing below inflation returns. However, their safe haven appeal along with quantitative easing has driven up prices. We think gilt prices will slip in 2013 and returns will be negative. That said, the falls are unlikely to be dramatic in our view.
Property to remain unattractive…for now Commercial property returns are highly correlated to economic growth, so until the economy picks up we are unlikely to want to invest again. That said, we will be watching flows carefully and monitoring supply and demand statistics, because there is some potential value there. When the market turns, the move could be quite sharp.
Active management will be vital Unfortunately, (or fortunately, since it keeps us in a job!) there is no such thing as a nirvana position in investment management, where the portfolio positioning is perfect and we don’t have to do anything for another 12 months. We believe active management will remain important and, whilst we are very happy with the funds we hold and the asset allocation for the time being, we know we will have to keep moving to stay ahead of the game. Change is inevitable, but progress is up to us.
Recent changes Talking of active management, we have recently made a number of changes to our ideal portfolios. Within our UK Large Companies equity portfolio, we have switched the Jupiter Income fund to the Investec UK Special Situations. Despite its name, the Investec fund invests mainly in large companies which provide above average dividends. It behaves in the way we want UK Large funds to behave, typically outperforming in falling markets and keeping pace in rising markets. However, the way Investec selects stocks is different from a pure income fund, focusing more on growth prospects rather than just the yield. This will diversify this part of the portfolio away from pure “defensive” stocks, hopefully increasing the growth potential without unduly increasing the risk. We have also made some substantial changes to our fixed interest portfolio.
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 | December 2012
We have sold the Blackrock CIF Corporate Bond tracker that made up 40% of our fixed interest portfolio. As outlined above, investment grade corporate bonds have had a fantastic run. We believe that returns will tail off and so holding an investment grade tracker no longer makes sense. As a result, we’ve diversified our fixed interest portfolio by switching into the following three funds: • JP Morgan Strategic Bond – 15% of portfolio. This fund can invest in any type of bond from government to high yield corporate. It is typically quite cautious and mainly invests overseas. All currency risk is hedged out. • M&G UK Inflation Linked Corporate Bond – 15% of portfolio. This fund invests in inflation linked corporate bonds. We are concerned that inflation could remain above the Bank of England’s target. • TwentyFour Dynamic Bond – 10% of portfolio. This is a small fund which can be very flexible and move quickly between types of bond. It can invest in niche areas which bigger funds cannot. All three funds have exhibited low levels of correlation with standard corporate bond funds, which should diversify our portfolio.
Christmas A reminder that the office will be manned by a skeleton staff only from Christmas Eve until 2 January 2013, when we re-open as normal. Please be assured we will be able to react to any market events and answer any urgent queries from clients.
MERRY CHRISTMAS AND A HAPPY NEW YEAR! Mike Deverell
Investment Manager
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 | December 2012
General Economic Overview Whilst the US “fiscal cliff” negotiations continue to cloud the picture, the global economy looks healthier than it has for some time. Whilst Europe and the UK will grow only very slowly at best, the US and emerging markets could pick up IF US politicians reach an agreement. We are becoming more concerned about inflation, with rhetoric from central banks hinting that they are happy to allow it to be higher than their targets whilst they try to stimulate economies.
Asset class key + positive - negative = neutral (normal behaviour)
+5 -5
strongly positive strongly negative
Equity Markets We remain very positive taking an 18 month view, based on valuations such as the Price/Earnings ratio. We particularly favour the UK and emerging markets.
Outlook
+3
Fixed Interest After a strong run in corporate bonds we believe returns will tail off, but remain positive. We are avoiding Gilts whose values have been inflated. We are also diversifying into inflation linked bonds.
-1
Commercial Property Whilst the rental yield on commercial property remains attractive, this is diluted by high levels of cash in property funds. We are seeing capital losses although we believe that overall returns will probably be positive, but low. However, we don’t believe the returns are worth the risk of investing in property at present.
-5
Residential Property
-5
We believe prices are likely to remain flat over 18 months. Cash With interest rates remaining at record lows, returns on cash could remain below average for some time. However, there is a short term safe haven appeal. Balanced Asset Allocation For a typical balanced portfolio we are overweight equity and cash, neutral fixed interest and hold no 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