Investment Report for September 2015

OVERVIEW

Last month the US Federal Reserve held-off a much anticipated interest rate rise, citing an uncertain economic outlook in emerging economies and China specifically. This added to the gloom engulfing markets in August, as a result of poor economic data from China. The impact of this was another poor month for investors as markets across the globe weakened further.

The losses in September topped-off the end to a very poor quarter for investors and was the worst three-month period since August 2011.

After saying that in the UK the FT100 share index closed flat at 6,060, but elsewhere the US market was down -4.1% and globally the overall picture was one of world markets dropping an average of -4.9%.

The problem is the Chinese economy which is growing at its slowest annual rate in 25 years. This is why commodity prices are falling which is holding prices in check across the world and has resulted in the disappearance of inflation.

There has been a sharp deceleration in the growth of global trade and the rapid drop in commodity prices is posing problems for resource-based economies – which are typical of emerging markets.

There were a few bright spots amongst the gloom; Fixed-interest securities offered investors some respite, with only a modest loss of -0.3% over the month and our perennial favorite, UK commercial property, put in another positive month with a gain of +1.2% overall.

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

All portfolios suffered modest falls in September, reflecting global market weakness due to concerns surrounding global growth.

Income Portfolio

The Income Portfolio lost -0.8% in September but out-performed its benchmark (the average mixed investment (20-60% shares) fund) which fell by -1.4%.

The out-performance is attributable to our heavy over-weight in UK commercial property and the use of a low risk “Absolute return” fund run by Standard Life.

This month we sold Newton Global Income and bought Artemis Global Income. There is nothing wrong with the Newton fund but I bought the Artemis fund as it is a punchier investment which could add to gains once markets started to improve. The manager has a super track record.

Balanced Portfolio

The Balanced Portfolio lost -0.7% in September but out-performed its benchmark (the average mixed investment (40-85% shares) fund) which fell by -1.9%.

The out-performance is attributable to our over-weight in UK commercial property and modest exposure to a low risk “Absolute return” fund run by Standard Life.

No changes were made to the portfolio this month.

Tactical Portfolio

The Tactical Portfolio lost -1.0% in September but out-performed its benchmark (the average Flexible fund) which fell by -2.4%.

The out-performance is due to our heavy overseas exposure, which benefited from weakness in Sterling and the fact that our UK exposure was focussed on smaller company shares, which were relatively strong.

No changes were made to the portfolio this month.

OUTLOOK

The outlook for inflation is now that it will be low for a long-time. This expectation is based on the value of index-linked securities which are a good proxy for what investors collectively are thinking. Low or non-existent inflation has been created by weak commodity prices that have dropped due to diminishing demand from the Chinese.

Investors fear that if the Chinese economy is weak then the world economy will be weak. This is in spite of the fact that growth is pretty decent here in the UK and in the US and its picking up in Europe. The IMF say that we will only get patchy growth in 2016 and that we face a 5^th year of slowing expansion in the emerging markets.

Markets have dropped quite a way now, with the global average recording a near 10% fall over the previous six months. In spite of this I still don’t see huge value and am therefore reluctant to buy more equities in our portfolios at present. In any event, the quarterly rebalance that is undertaken will result in us purchasing some of the securities that have fallen the most over the previous quarter, which could be a boost when things improve.

Short-term we fear more bad news from China which will keep markets on the back foot compounded by the first rate hike in the US and UK. This could be the nadir, as future rate increases will be “in the price” at this point and this could represent an attractive entry point for us in the main markets.

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”.