OVERVIEW
In the US concerns that interest rates may rise sooner than expected helped cause jitters on Wall Street. Ironically, these concerns were made worse due to the strength of the rebound in economic activity in the US following a very poor first quarter due to bad weather.
Surveys showing China’s manufacturing sector picking up pace was a boost to the Asian markets which were strong this month.
European stocks have been weak after the economic numbers in the region were very poor, with recession looming again in France, Germany and Spain. The more robust health of the US economy stands in contrast with Europe’s meek performance, apparently worsened of late by fallout from the Ukraine crisis.
Indeed, rising geopolitical tensions have done the markets no favours, with issue in the Ukraine, Gaza and Iraq all contribution to negative investor sentiment.
At home Bank of England (BoE) Governor Mark Carney said interest rate increases will be more restrained than in the past as the economy continues to face challenges
Speaking in Glasgow ahead of the opening of the Commonwealth Games, he warned that a stronger pound, weak demand in key export markets and Government budget-cutting are holding back growth.
He said that there were several dynamics that are “likely to keep rates lower than in the past”, including continued imbalances between global saving and investment, potentially lower rates of global productivity growth and the Monetary Policy Committee’s (MPC) acute concern about prospects for Indebtedness of vulnerable households.
UK commercial property is now benefiting from boom conditions in the city.
Here is the chart of the FTSE 100 index for the last six months;
…and the last five years, which puts this into perspective;
FUND PERFORMANCE
Here are tables showing the performance of the portfolios over various periods of time to the end of June;
Short-term Performance
| Parmenion Portfolio/Index | One monthPerformance to 30 June 2014 | One year performance to 30 June 2014 |
| Income Portfolio | +0.4% | +7.4% |
| Average Mixed Investment fund (20-60% shares) | +0.2% | +4.2% |
| Balanced Portfolio | +0.4% | +6.0% |
| Average Mixed Investment fund (40-85% shares) | +0.2% | +4.1% |
| Tactical Portfolio | +0.3% | +6.8% |
| Average Flexible Investment Fund | +0.3% | +4.0% |
| MSCI UK | +0.7% | +6.0% |
| MSCI World (£) | +1.2% | +5.6% |
| IBOX Gilt | +1.1% | +2.8% |
Long-term Performance
| Parmenion Portfolio/Index | Three year performance 30 June 2014 | Five year performance to 30 June 2014 |
| Income Portfolio | +26.1% | +64.9% |
| Average Mixed Investment fund (20-60% shares) | +17.4% | +41.6% |
| Balanced Portfolio | +23.2% | +62.9% |
| Average Mixed Investment fund (40-85% shares) | +21.2% | +53.2% |
| Tactical Portfolio | +21.1% | +65.4% |
| Average Flexible Investment Fund | +18.0% | +53.1% |
| MSCI UK | +30.5% | +75.6% |
| MSCI World (£) | +39.0% | +82.3% |
| IBOX Gilt | +14.3% | +31.7% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
All portfolios produced very modest returns as the markets were pretty flat overall in July. The US and Asian markets were strong, European markets were weak and commercial property made excellent gains once again.
No changes were made to any of the portfolios in July.
Income Portfolio
The Income portfolio gained 0.4% in July marginally out-performing its benchmark (the average mixed investment (20-60% shares) fund) which gained 0.2%.
Our holdings in UK commercial property helped offset a general lack of direction in equities.
Balanced Portfolio
The Balanced portfolio gained +0.4% out-performing its benchmark (the average mixed investment (40-80% shares) fund) which increased by 0.2%.
Our holdings in UK commercial property helped offset a general lack of direction in equities.
Tactical Portfolio
The Tactical portfolio gained 0.3% in July, growing in-line with its benchmark (the average flexible fund) which also grew by +0.3%.
Our focus on European Equities hindered performance but this was offset by strong returns from our positions in Asia.
LONDON’S BOOMING PROPERTY MARKET
Sovereign wealth funds are battling institutional investors, such as pension funds and insurance companies, for the capital’s commercial property, driving prices ever higher.
Asset prices are up 11 per cent year on year, according to Real Capital Analytics/Property Data, while yields have been falling sharply.
More than three-quarters of the money spent in the London market in the first three months of this year came from international buyers, according to figures from Cushman & Wakefield.
But even with the buoyant market, a handful of purchases have stood out.
The Indian property company Lodha’s £300m purchase last year of the Canadian embassy building on Grosvenor Square, and Chinese developer Greenland’s acquisition of the Ram Brewery site in Wandsworth, south London, for £600m both raised eyebrows among seasoned property watchers.
At the turn of the year, two record-breaking transactions took place which further exemplified the trend: Singaporean sovereign wealth fund GIC bought a 50 per cent stake in the Broadgate office complex for £1.7bn; and Kuwaiti property company St Martins spent a similar amount to acquire the More London estate. Both were record-breaking prices for the London market.
We seem to be in the middle of a sellers’ market.
Indeed, some of Britain’s most experienced property investors are seizing the moment to shed assets and free up cash. The big listed companies – real estate investment trusts such as British Land and Land Securities – have shifted to become net sellers in the past six to 12 months, for the first time since 2009.
So is it a case of buyer beware? When the locals are selling for very healthy profits, is it time to exercise more caution? Less experienced buyers coupled with more experienced sellers are, in any investment market, generally a good sign that a certain point in the asset pricing cycle has been reached. The question being asked now, is whether the market has reached its peak – or has further to go.
Are buyers being driven into making overly optimistic bids by the weight of money in their pocket? The renewed rhetoric from analysts with very short memories that “the only way is up” only adds to the property fever.
Arguments such as “this is the new normal” always give cause for concern.
There is, however, a way to explain why companies are still in the market to buy.
First, they evaluate investment performance over much longer timescales than most domestic investors. An institutional investor is looking for long-term, stable, ideally inflation-linked returns that most closely match their liabilities – and these could stretch for 40 years or more.
A building whose price is based on a 10- or 15-year returns model can look cheap to a buyer with a 40-year perspective.
Second, there is the currency aspect. The devaluation of sterling since the global economic crisis has not only seen British exports become more competitive – it has also made British property cheaper. Buyers whose investment model is priced in Singapore or Hong Kong dollars, for example, have found even iconic London trophy assets surprisingly affordable.
And finally, on the question of sustainability: as the middle classes in the emerging markets continue to grow, the weight of savings in their home markets is likely to continue to spill out across the globe in search of investment opportunities.
What implications does this have for demand?
Last year, China doubled the proportion of international investment it permits to be placed in property – but that still only represents 2 per cent of the total. That figure alone suggests that the tidal wave of cash flowing into property assets around the globe is unlikely to recede in the coming years.
OUTLOOK
We are getting more cautious of equities generally thinking that there is little room for profits growth in the UK and US, and we will soon be “fighting the fed” as interest rates start to rise. However, there is ample room for things to improve in Asia and Europe as both regions are in the doldrums. Action by the ECB could give a shot in the arm to European equities and could knock on in a positive way to global markets.
We have run an over-weight position in equities generally for several years now and we are inclined to trim this back to a neutral weighting going forward, especially as we have recently identified a high yielding fixed income fund which looks attractive.
It goes without saying that we like the UK commercial property market and will continue to remain heavily invested here.
PS Don’t forget the usual risk warning for all long-term investments; the value of units can fall as well as rise, and past performance is no guarantee of future performance. The value of income payments from investment funds is not guaranteed and can fall as well as rise.
