Investment Report for April 2015

OVERVIEW

 

April was a positive month for the domestic stock market which rose by +3.0%. This was in spite of the looming election where a hung parliament was universally forecast. The gains were due to a revival of the fortunes of the nation’s oil companies, which form a large part of the UK market, along with a takeover of BG. The economic data for the UK was also good.

 

Developed markets produced mixed returns. Disappointing data from the US, with growth tailing off, lead to a drop is the $. European markets pulled back as investors took profits after the surge earlier in the year.

 

Emerging markets performed strongly in April, largely due to a “relief rally” as the US$ weakened. A strong $ causes pain for the regions debtor companies, which often borrow in dollars.

 

Asian markets were mixed. The stand-out performer was China, which has enjoyed a massive market surge. This will all end in tears as the country’s economy is slowing, following a property collapse.

 

In Japan the market was firm as the country benefited from a weaker currency and improved export prospects.

 

Globally, fixed interest securities were weak as the threat of deflation eased. This means that many countries (especially Germany) now have to pay to borrow money again instead of receiving interest from their lenders (ie, interest rates were negative).

 

Commercial property made modest progress after suffering a modest blip in the spring owing to property write-downs by the Supermarkets, who now realise that they have too many large out-of-town stores.

 

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

 

Short-term Performance

 

 

Long-term Performance

 

(Source; Parmenion Capital Partners LLP)

 

 

PORTFOLIO REVIEW

 

All Portfolios

 

Our portfolios turned in tiny losses during the month, mostly due to the fact that we had heavy overseas exposure and are light in the UK, which was one of the best performing markets in April.

Income Portfolio

 

The Income portfolio lost -0.1% in April, marginally under-performing its benchmark (the average mixed investment (20-60% shares) fund) which gained +0.1%.

 

No changes were made to the portfolio this month.

 

Balanced Portfolio

 

The Balanced portfolio lost -0.2% in April, marginally under-performing its benchmark (the average mixed investment (40-80% shares) fund) which gained +0.1%.

 

No changes were made to the portfolio this month.

 

Tactical Portfolio

 

The Tactical portfolio lost -0.1% in April, under-performing its benchmark (the average flexible fund) which gained +0.2%.

 

No changes were made to the portfolio this month.

 

 

INTEREST RATES; WHEN WILL THEY RISE?

 

Now that the Election has concluded, the Bank of England’s six week period of purdah has ended.  It will be back to business as usual, with officials no longer barred from speaking in public.

 

The latest economic statistics that Mark Carney’s team will review may well be distorted by some of the caution felt by both consumers and companies ahead of an uncertain election outcome. Now that there is a majority government in office with plans for more austerity, it will be a significant discussion point at the Bank just what the effects of this will be on long-term economic activity.  Should cuts in Government spending act as a drag on growth, then interest rates may remain at rock bottom for longer still, to offset any potential slowdown.

 

At the moment inflation remains close to zero. This means the Governor has to write letters to the Chancellor explaining why the 2% target rise in prices is being missed. The dramatic fall in oil price over the past year has contributed a great deal to the problem. But this is unlikely to lead to deflation, which is a continuous fall in prices, because the commodity price fall will drop out of the annual figures soon and the truer trend of underlying inflation should then emerge. Wage growth is the other key determinant; with UK productivity so weak wages are unlikely to rise rapidly, so no pressure for a rate rise from this direction.

 

Finally there is the wider global picture to consider; the Eurozone is still coping with its imbalances between north and south, with little adjustment between the two. Germany still exports whilst the south struggles to make themselves competitive. Greece may soon run out of cash to pay state employees and pensions. Disruption inside the Eurozone is not helpful as it is the UK largest trading partner.

 

The US is another market whose future growth trajectory is uncertain. A bad winter and a port strike subdued their first quarter growth numbers. How well the economy recovers in the second quarter should give an indication of the robustness of the American economy.

 

China continues to cut interest rates to stimulate growth, so really how strong is their economy and could its building programme get any further out of hand?

 

Given all of the above, our expectation is that rates will only start to rise in the summer of 2016. Even when they actually do start to increase, it is very likely that they will rise only slowly and take a good while getting up to the “new normal” which is likely to be between 2% and 3%. Against this back drop, there may be some heightened risk sensitivity but no sign this May of markets is fundamentally looking to head south.

 

 

OUTLOOK

 

The US recovery has lost momentum and the pace of hiring employees has moderated, fuelling market expectations that an interest-rate increase is unlikely by the middle of the year.

 

The central bank entered 2015 in a bullish mood amid blockbuster jobs figures and strong household spending. However the data has deteriorated sharply in recent months, in part because of a surge in the dollar and tumbling oil-related investment.

 

While the central bank is leaving open the option of a June interest rate rise, it has looked increasingly unlikely to move that soon.

 

Meantime companies in the US look set to return $1.0T to investors by way of special dividends and share buy-backs, which is supportive of current valuations.

 

Europe, on the other hand, has just deployed its large scale bond-buying programme in an effort to aid economic recovery, whilst interest rates remain at record lows. Things seem to be moving here with economic activity picking up.

 

We are concerned about the UK economy where things seemed to have been “pumped up” prior to the election. We genuinely felt that the Tories didn’t expect to win and have therefore made a large number of commitments relating to taxation particularly, that they will have trouble keeping – and only at the expense of large cuts in public expenditure.

 

We therefore see trouble ahead and think that Sterling could weaken, especially in the run up to our referendum on Europe.

 

On balance Europe is the region on the up and we are therefore looking to increase our allocation here, whilst remaining light in the UK and maintaining exposure to the US market.

 

We like fixed-income securities even less than before, now the threat of deflation is receding. We maintain our heavy exposure to commercial property as a “bond proxy”; property has some of the attributes of a fixed-income security and therefore is a useful alternative.

 

Overall, markets are looking expensive so we are taking a cautious approach and are currently searching for lower-risk diversification in some portfolios.