Investment Newsletter April 2015
The Bumpy Road to Downing Street Mike Deverell Investment Manager
In a few weeks’ time the country goes to the polls in what is the most uncertain general election in recent history. As we have said before, markets hate uncertainty and so it is possible we could see volatility around election time. However, to date we have not seen much evidence of this and the FTSE 100 has pushed past the 7,000 mark for the first time in its history. So does this mean that markets don’t care about the election? Clearly not, but it is true to say that historically there has not been a pattern of markets doing significantly better or worse following a Conservative or Labour victory. Whilst they have different policies in many areas, from an economic point of view the gap between the three main parties is relatively small. Oxford Economics recently released a study examining what would happen to the UK economy and debt position under the three main
parties. They forecast growth over the next parliament of 2.8% pa under the Liberal Democrats, 2.7% pa under Labour and 2.6% pa under the Conservatives. By contrast, debt would be lower under Conservative plans than under the other two. Andrew Goodwin, senior UK economist at Oxford Economics, told the Financial Times: “In our view it is very difficult to argue that the benefits offered by the more austere Conservative plans are anywhere near large enough to offset the opportunity of stronger growth offered by the plans of the Liberal Democrats or Labour,” he said. But he added that under the Tory plans, which would produce lower borrowing and government debt, “if you wait another 10 years or so, you would have capacity for stronger growth”.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA 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 2015
The Bumpy Road to Downing Street cont’d
Given the difference in projected economic growth between each of the parties is so low you can see why it may make little difference to the stockmarket which party is in power. However, after the last election the UK market did see a short term dip because for a short time NOBODY was in power. The hung parliament was generally unexpected but once a government was formed, the market bounced. This time around a hung parliament looks a foregone conclusion. You could say that uncertainty looks pretty certain which clearly has less of an impact than uncertain uncertainty (to paraphrase Donald Rumsfeld)! Despite that, the known unknowns are important as the makeup of any coalition (formal or otherwise) is very unclear.
Asian Tiger
impact on the spending plans of businesses. Present projections show that it would take more than two parties in coalition to hold a majority. As such, it could take even longer to form a government after the election than in 2010. Despite rising equity markets, we still feel that holding more cash than usual makes sense at present. If markets do dip we can then use this as a buying opportunity, as we feel the longer term prospects for equities remains sound. Volatility may not be confined to equities but may affect the bond and currency markets. In fact, there are early signs of volatility in Sterling already.
If the Scottish Nationalists are involved then further devolution or independence could come back onto the agenda. On the other hand, the Conservatives have promised a referendum on EU membership, although they are likely to campaign to remain in Europe. This could change if UKIP had any say in power. These are both areas of major economic uncertainty and could
If this uncertainty does not manifest itself in any great way then we will reinvest the cash elsewhere after the election. However, we feel it pays to be cautious right now, particularly with markets at record highs.
It is not just the UK stockmarket which has seen gains recently but equities around the world. In particular, we have seen some very good returns from two of the areas we have favoured for some time; Japan and China.
The chart below shows the performance of these funds over 12 months. Also added is the FTSE Allshare for comparison (green line):
Our Japanese and Chinese holdings are our best performing funds over the past year by some distance. This has helped all portfolios but especially the more adventurous ones which naturally have higher exposure.
(Past performance is never a guide to future performance. Investments may (will) fall as well as rise.)
A - Baillie Gifford - Japanese B Inc TR in GB [39.73%] B - Invesco Perpetual - Hong Kong & China Z Acc GB [39.04%] C - Schroder - Tokyo A Inc TR in GB [36.35%] D - FTSE All Share TR in GB [12.03%]
11/04/2014 - 13/04/2015 Data from FE 2015
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA 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 2015
Asian Tiger cont’d
From the chart you can see that our Chinese fund (Invesco Hong Kong & China) has achieved around half of its 39% gain in the last month. In fact, as I write it has gained over 15% in four days! Mainland Chinese shares have done phenomenally well in the past year as investors in China have piled into the stockmarket. It has been difficult for Western listed funds to keep pace as there are restrictions on the amount of mainland Chinese stocks they can buy. However, many Chinese companies are dual listed in either Shanghai or Shenzen (known as A shares) as well as in Hong Kong (H Shares). Most Western funds buy H shares as they are easier to access.
going for a little while yet. Fundamentally, many Hong Kong and China stocks still look reasonably cheap in our opinion. However, given the way we think about investments such a steep rally inevitably makes us start looking at the risks even more closely! If the rally continues at this pace we will likely take some profits quite soon, but for now we are very happy with the returns of these funds.
Historically, Hong Kong stocks have traded at a small premium to Chinese stocks because of this greater accessibility. Over the past 12 months this has changed after the huge rally in mainland China, and H shares now often trade at quite a large discount. Recent changes have made it easier for investors in China to buy H shares. Mainland investors are therefore now looking to buy the cheaper Hong Kong stocks rather than the expensive A shares. The Hong Kong market is now playing catchup. This is very welcome and we feel that it could keep
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA 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 2015
General Economic Overview We see a mixed picture for the global economy. The UK and US continue to see robust growth and their Central Banks are considering increasing interest rates in the next 12 months or so. Meanwhile, Europe and Japan are both trying to bolster their economies with stimulus such as quantitative easing. Inflation is at zero in the UK (CPI) and remains low throughout most of the world, driven mainly by lower oil prices. As prices have stabilised inflation should move higher over the next few months with the drop in oil falling out of the calculation. Asset class key + positive - negative = neutral (normal behaviour)
+5 strongly positive -5 strongly negative
Asset Class Equity Markets Our equity score remains the same as last month at -1. A score of -1 means we expect perhaps 9% pa in total returns over the next 18 months. We remain most positive about Japan and Asian stocks and smaller companies in the UK.
Score
-1
Fixed Interest We believe that fixed interest will return less than our neutral 6% pa assumption over the next 18 months, perhaps seeing around 4% pa instead. If interest rates rise it is possible that some bonds could see capital losses. As such our portfolio is positioned quite cautiously and should be much less sensitive to changes in interest rates.
-3
Commercial Property Commercial property has performed very strongly over the past 12 months but has slowed down somewhat since the start of the year. We still think returns will somewhat be greater than our neutral 7% pa over the next 18 months given the robust UK economy.
+1
Cash With interest rates remaining at record lows, returns on cash will remain below average for the foreseeable future. Rates may increase by 0.25% perhaps in late 2015 or early 2016.
-5
Balanced Asset Allocation For a typical balanced portfolio we are underweight fixed interest and overweight property, and underweight equity in favour of the more defensive alternative equity. 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.
The value of your investments can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA 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.