OVERVIEW
October was a fairly calm month for investors in the UK market with the FTSE 100 share index appreciating by +0.5%. Overseas investments did better due to currency changes where continued weakness in Sterling over concerns of a “hard Brexit” meant that Pound fell in value. This translated into strong gains for those holding investments in America, Asia and Europe with the FTSE World index climbing by an impressive +4.9% over the month.
UK focused property funds continued their recovery with values increasing to close in on pre-Brexit levels.
Fixed-interest securities continued to weaken in value. This reflects a belief that in the UK we will struggle to fund our national debt due to the uncertainty about the Nation’s economic future and we therefore will need to pay higher rates of interest in order to attract sufficient funds.
Stop Press
Trump won a very fraught US presidential election campaign. The pollsters got it wrong again!
Initial market reaction was negative, but the US market quickly rebounded as Trump’s economic policy is likely to be expansionist – which is supportive of many sectors of the economy. However, US Treasuries (the equivalent of our Gilts) have since fallen in value as economic expansion funded by Government borrowing will require higher interest rates to attract investors.
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
The tables enclosed show the performance of the portfolios over various time periods to the end of October;
Short-term Performance
| Parmenion Portfolio/Index |
One month Performance to 31 October 2016 |
One year Performance to 31 October 2016 |
| Income Portfolio |
0.0% |
+5.8% |
| Average Mixed Investment fund (20-60% shares) |
+0.7% |
+9.7% |
| Balanced Portfolio |
+0.3% |
+9.5% |
| Average Mixed Investment fund (40-85% shares) |
+1.5% |
+12.4% |
| Tactical Portfolio |
+1.4% |
+16.2% |
| Average Flexible Investment Fund |
+2.4% |
+13.8% |
| FTSE all share index |
+0.5% |
+12.2% |
| FTSE world index exUK (£) |
+1.4% |
+32.3% |
| IBOX Gilt Index |
-4.0% |
+9.8% |
Long-term Performance
| Parmenion Portfolio/Index |
Three year Performance to 31 October 2016 |
Five year Performance to 31 October 2016 |
| Income Portfolio |
+19.4% |
+48.0% |
| Average Mixed Investment fund (20-60% shares) |
+16.1% |
+36.3% |
| Balanced Portfolio |
+24.3% |
+53.3% |
| Average Mixed Investment fund (40-85% shares) |
+20.5% |
+49.1% |
| Tactical Portfolio |
+34.1% |
+68.2% |
| Average Flexible Investment Fund |
+21.0% |
+48.4% |
| FTSE all share index |
+16.7% |
+57.3% |
| FTSE world index ex UK (£) |
+50.1% |
+108.3% |
| IBOX Gilt Index |
+23.9% |
+29.9% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
All portfolios made further modest gains in October building on the strong gains made since “Brexit”.
Income Portfolio
The Income Portfolio remained unchanged in October under-performing the benchmark (the average mixed investment (20-60% shares) fund) which gained +0.7%.
Our exposure to UK fixed-interest securities hurt returns this month.
No changes were made to the portfolio this month.
Balanced Portfolio
The Balanced Portfolio gained +0.3% in October, just under-performing the benchmark (the average mixed investment (40-80% shares) fund) which gained +1.4%.
Our UK exposure hurt relative returns.
No changes were made to the portfolio this month.
Tactical Portfolio
The Tactical Portfolio gained +1.4% in October, under-performing the benchmark (the average Flexible fund) which also gained +2.4%.
Our exposure to UK smaller companies was a drag on returns this month.
No changes were made to the portfolio this month.
DONALD TRUMP – WHAT FOR THE MARKETS?
A Trump victory may have initially sent markets into a spin, but they quickly rallied off their lows on what was a quite conciliatory victory speech. More significantly for the world economy US long-term interest rates have risen significantly, the yield on a 10-year Treasury Bond rising from 1.8% to 2.2% in short-order. This is a really significant increase. The rise indicates that markets believe that Trump could stimulate economic growth and inflation through his promise of significant fiscal stimulus.
On the other hand, Trump’s anti-free trade rhetoric threatens global growth and could explain the greater negative reaction in Asia, which is more reliant on its relationship with the US than in Europe.
For the wider world, however, if the US erects barriers to trade then the consequences are probably more serious. Exporters will struggle as the cost of trade rises, which will be a particular blow to emerging markets that seem to have been stabilising of late. Oil names may suffer as Trump has promised to allow the shale producers to pump as much as they like with little environmental considerations. Good for those companies with US assets, but likely to pressure the oil price and overseas oil companies.
With the threat to established institutions like NATO, we will likely see political volatility remain heightened, particularly given looming elections and referendums in Europe.
If we have learnt anything, it is that the polls are not to be believed!
OUTLOOK
Global interest rates are on the rise. This isn’t the rate that you pay to the bank, but long-term rates which determines the cost of Government and Corporate borrowing. At the same time equity markets have been strong.
The upshot of this is that we could well experience a return of inflation which ultimately means higher interest rates. This would probably be welcomed by investors, but could be bad for the markets.
In the meantime, it would appear that on balance Trump could be good for the US economy and we may well add to our US positions as a result of this.
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”.
