Investment Newsletter February 2015
Rising Markets, Falling Prices Mike Deverell Investment Manager
Stockmarkets have rallied in the past few weeks after a shaky start to the New Year. After ending 2014 at 6,566, the FTSE 100 twice dipped below 6,400 in January, most recently closing at 6,388 on 14 January. From there it staged a spectacular recovery reaching over 6,832 on 23 January, a 7% move in little more than a week. Since then, markets have been flattened off, fluctuating around the 6,800 mark. The catalyst for this rally was the announcement from the European Central Bank (ECB) that they would finally carry out true quantitative easing, a full six years after the UK and US did the same. The ECB will be electronically “printing” 60 billion Euros a month from now until September 2016. Their intention is to stimulate the European economy and get inflation back, close to their 2% pa target.
Inflation in the UK was at 0.5% in December, partly as a result of falling oil prices, whilst in the Euro area it was MINUS 0.2%. Deflation is something that central banks want to avoid at all costs. There is an argument that you can have short term “good deflation” where low fuel prices (for example) act as a mini tax cut, meaning consumers have more money in their pockets. However, if deflation becomes entrenched it can result in a vicious spiral where consumers stop spending in anticipation of cheaper prices, resulting in weaker economic growth and more deflationary pressures. How effective quantitative easing is at tackling growth and deflation worries is still a matter of debate. However, it does appear to have an effect on asset values. The newly printed money is used to buy government
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 February 2015
Rising Markets, Falling Prices cont’d
bonds from institutions, pushing up prices and in turn pushing down the yield and the future return. In theory, those institutions might then invest elsewhere, boosting prices of other assets like equities. As a result, when QE was announced stockmarkets jumped, despite uncertainty about the situation in Greece.
Portfolio Changes
There have been a number of recent changes to portfolios. Firstly, in response to rising markets we took the opportunity to bank some gains by selling the remaining index tracker bought as part of our volatility trading. The fund was bought at the beginning of October at a FTSE level of just over 6,500, and we were able to sell it again at above 6,800 for a gain of more than 6%. We have subsequently reinvested this cash into alternative equity – specifically the Old Mutual Global Equity Absolute Return fund and the Invesco Perpetual Global Target Return fund. Both of these funds have shown not just good returns but low levels of correlation to traditional equity markets.
We think these are good strategies in which to invest when markets are a little higher. As you will see from the last page of this newsletter, our equity score has dropped to a -1 from last month’s +1 score. What that means is we expect maybe 9% pa over the next 18 months rather than last month when we were looking at 11% pa. The difference between the two numbers is basically explained by the movement in markets. To be clear, a -1 score still implies some reasonable returns from the equity markets, but we think it makes sense to be cautious in the short term. We think markets could be volatile for a while with continued uncertainty in Europe as well as an election coming up in the UK.
The chart below shows the two funds relative to the FTSE Allshare Index over the past 12 months. Note the performance during periods when the market has dipped:
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 February 2015
Portfolio Changes Cont’d
Another change to portfolios has come as a result of our Defined Returns product with Credit Suisse “kicking out”. This product was due to end provided the FTSE was over 6,449 and the S&P 500 (the main US market index) above 1,755 on 4 February. In the end both indices were well above this level and the product returned the advertised 11.5% over the year.
Finally, we have also made a couple of other tweaks to portfolios. Those who read last month’s newsletter will not be surprised to note that we have reduced fixed interest further, in favour of property. For most clients we have sold the M&G UK Inflation Linked Corporate Bond fund as the protection this gives us against inflation is not currently required. We have generally moved this to the M&G Property Portfolio fund. We have also made a change within our UK Conservative Equity strategy, dropping the Investec Special Situations fund in favour of the Royal London UK Equity Income fund. We prefer a true “income” strategy in current markets and this fund has a good history of providing high levels of dividends, which also tend to grow above inflation.
We will shortly have the cash from this product available to reinvest. At present market levels we do not want to set up a new Defined Returns product, especially if we think markets could dip back in the short term. Our current intention is to set up a new product on a market dip, so in the short term we might hold more cash than usual in portfolios.
We continue to have a positive outlook for portfolios and think we could see some good returns over the next couple of years. However, in the short term, we are being a little bit cautious.
We will continue to review this and may invest elsewhere if we do not get an attractive opportunity in Defined Returns.
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 February 2015
General Economic Overview Growth within the UK and US remains strong but elsewhere the picture looks slightly weaker. Within the Eurozone and Japan, central banks are attempting to address this with quantitative easing. Inflation will remain low for some time due to the effects of the fall in oil prices, although oil does now appear to have stabilised and has actually recovered somewhat. It is possible that interest rates in the UK could go up towards the end of the year, and the US could act sooner. Asset class key + positive - negative = neutral (normal behaviour)
+5 strongly positive -5 strongly negative
Asset Class Equity Markets Our equity score has dropped from a +1 last month to -1 this month after a market rally. This means we expect slightly less than the usual 10% pa assumption over the next 18 months. We remain especially positive towards Asia and towards smaller companies in the UK.
Score
-1
Fixed Interest We believe that fixed interest will return significantly less than our neutral 6% pa assumption over the next 18 months. We feel that longer dated bonds yields are too low and should increase, meaning a fall in prices. As a result we prefer shorter dated bonds.
-4
Commercial Property Property is still seeing a lot of money flowing into the sector. We still expect some good growth going forward but after such strong momentum we have marginally downgraded from a +3 to a +2 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 in late 2015.
+2 -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 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.