Investment Newsletter - December 2014 by Equilibrium Financial Planning LLP

Investment Newsletter December 2014

Santa Rally? Mike Deverell Investment Manager

We are well into December now but the usual Santa Rally seems to have gone into reverse so far this year! Rudolf and the other Reindeers appear to have detached themselves from Santa’s sleigh and gravity is taking hold… Having ended November at 6,722, the FTSE 100 has dropped back to 6,200 as I write (the morning of 16 December). As a result we are currently conducting one of our “volatility trades” – where we buy on market dips and sell after a rise. We are using the proceeds of a previous volatility trade, where we bought a FTSE tracker at around 6,240 in October and then sold again at around 6,500. The December slide contrasts (at least so far) with each of the past 11 years where the FTSE has ended December in positive territory.

This has plenty of benefits for consumers and many companies, but also some drawbacks. The low price has pushed oil dependent Venezuela to the brink of default and is also causing massive issues in Russia. The rouble has dropped 39% against the dollar since the end of June, making a lot of Russians much poorer. There are even some concerns about Russian debt default, although this remains a distant prospect for now. For more details on what has been happening with oil, you can read my latest article for Citywire by clicking this link if you are reading electronically :

http://citywire.co.uk/money/what-does-the-fallingoil-price-mean-for-investors/a788325

The recent falls are partly a result of the falls in oil price. 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 December 2014

Santa Rally cont’d

Meanwhile, in Greece there is a presidential election. At present there is a chance no agreement will be reached, triggering general elections with the perceived antiEuropean Syriza in pole position. Should they get in power this has a knock on effect to Eurozone stability, albeit the currency block is in a much better position than in 2011. In addition, Syriza has softened their rhetoric towards Europe over this year and now are in favour of remaining in the Euro. However all this uncertainty has led to many investors deciding to reduce risk in their portfolios by selling equities.

rather than a major move downwards, but of course this depends on how these events play out. The FTSE could easily still finish December in positive territory. Last December it dipped early in the month before rallying towards the end of year, finishing the month higher than where it started. You may remember we have been running a competition to guess the FTSE level at the end of the year. This competition is now closed and the nearest guesses either side of the current level are 6,150 and 6,392! However, there is still plenty of time to go and it could all change before the New Year!

In our view this is more likely to be a temporary shift

The Story So Far

As we get nearer Christmas, now is the time when we naturally look back on the year just gone and look forward to the year ahead. Markets have been volatile in December, but for this year as a whole returns have been much more difficult to come by than in the previous two years. From 31 December 2013 to close on 15 December 2014 the FTSE Allshare is down 4.61% even when we factor in dividends. This is a disappointing return and it means that other parts of portfolios have had to work harder to achieve returns! Generally, we are pleased to report that the other asset classes have done their job. Even within equities, because we allocate overseas and to other areas like smaller companies, the equity returns of a balanced portfolio have been 0.96% positive over the same period. Not particularly attractive, but pleasing in context. Overall, a balanced portfolio after our maximum 1.5% fee has returned around 3% year to date. Again, given the context of a falling FTSE we are satisfied with this return.

We also had a successful “kickout” of our Barclays Defined Returns product. This produced an 8% return during a period when the FTSE was relatively flat, up just 0.5% in price terms or around 3.5% after dividends. This was a very close call as the week prior and the week after the product ended saw FTSE levels below the kickout point! One area which has not worked so well has been our fixed interest allocation. Fixed interest is generally corporate and government bonds but right now we hold very few of the latter. Again, this has not been disastrous as it has returned around 3.2% year to date. However, it made all its returns in the first six months of the year and since then has been flat. During the same period, gilts had rallied significantly, so our relative performance has been dragged down by not holding gilts. As we always say, we’re never going to get everything right so our aim is to get more right than we get wrong! More importantly, we also aim to make more money on the ones we get right than we lose when we get them wrong! It is pleasing to report that we have more than met both these aims this year.

Our main successful investment call was our overweight position in property, with our property portfolio returning 10.75% year to date. Alternative equity, funds that have equity risk but the ability to make money in falling markets, returned 5.26% over the same period.

The Next Chapter

Looking forward to next year, our main theme is to continue holding our steady course. We retain a positive outlook towards equity markets. Asian markets have done very well this year and that is one area in particular we think has further to go. We are still very optimistic towards property and think returns can continue at some pace for some time next year.

We are holding course with fixed interest, having much less in portfolios than usual and taking a very defensive stance with respect to interest rate rises. All in all, we think 2015 can see another positive year of returns. If we can achieve similar returns from property and fixed interest as last year and if equity markets pick up just a little bit, we think we could see some very decent investment 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.

Market Views December 2014

General Economic Overview The global economy is still doing ok with the US and the UK continuing to lead. However, emerging market growth remains soft and so needs watching carefully. The falling oil price could boost growth in the West but could be a challenge for certain countries. We expect interest rates to go up at some point in 2015, but this may not be until half way through the year. Inflation remains low and the falling oil price may ensure it stays that way for some time. Asset class key + positive - negative = neutral (normal behaviour)

+5 strongly positive -5 strongly negative

Asset Class

Score

Equity Markets Given the recent dip in markets our score has increased from a +1 to a +2. Many markets still remain reasonable value and we believe the recent falls are temporary. We remain especially positive towards Japan, China and Asia in general.

Fixed Interest We believe that fixed interest will return less than our neutral 6% pa assumption over the next 18 months. As rates may go up next year we prefer shorter duration bonds and corporate bonds over government bonds which are less sensitive to rate movements.

-3

Commercial Property Property is still seeing a lot of momentum and money flowing into the sector, pushing up property prices. We are just starting to see falling vacancy rates and rental increases which will aid the asset class and we retain a very positive outlook.

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 mid to late next year.

-5

Balanced Asset Allocation For a typical balanced portfolio we are underweight fixed interest and overweight property, and slightly overweight 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 Equilibriumâ&#x20AC;&#x2122;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.