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Investment Committee Meeting Minutes - December 2015

  • By Richard Ellis
  • 09 Feb, 2016

Investment markets hate uncertainty, as such volatility is extremely high on a daily basis. Despite the recent negativity there will be quality companies that have seen their share price slashed that now seem good value. When the markets recover, which they will, these are the share prices that will react positively first. As we frequently say, the value of an investment is only crucial on the day you buy it and the day you sell it. If you are a long term investor with time to be patient to await the recovery, do so. Now is a time to hold one’s nerve. 

Fraser Heath Market Update


  • The FTSE 100 Index hit a three-year low mid-month as further weakness in the oil price and dividend cuts outweighed positive news on UK bank stress tests.

  • Inflation turned positive for the first time since the summer. CPI rose by 0.1% boosted by upward movements in transport costs as well as alcohol and tobacco prices.

  • GDP growth was at the slowest pace since late 2012 as trade and financial services weighed on the economy.

  • Consumer spending remained strong driven by a fall in the savings ratio to the lowest level since 1963.


  • The US equity market ended December lower as volatile crude oil prices weighed on sentiment to bring about a return of -1.6% for the S&P 500.

  • At sector level, energy stocks were the worst performers after it became clear there would be a huge glut of oil in the New Year, following the announcement by OPEC that the cartel would not cut production to alleviate the oversupply problem.

  • Healthcare stocks performed well after it was reported that 6 million Americans had signed up for the subsidised health insurance widely known as Obama Care.

  • Most significant news for December was that the Fed increased interest rates by 25 basis points; the first increase in nearly a decade.

  • Fed chair, Janet Yellen, said that they will increase interest rates slowly. The labour market, to which Yellen pays considerable attention, has improved further. Although first time claims for unemployment benefits had risen, in December the unemployment rate reached 5% which is half of its recession peak.


  • In December, European equity markets retreated. The month saw the Euro’s biggest daily rally since 2009 against the US dollar, after the ECB unveiled a smaller than anticipated stimulus package.

  • All market sectors declined with the biggest detractors being energy and basic materials.

  • Some macro-economic data held up fairly well relative to equity markets. Data showed that the Eurozone Manufacturing Indices increased for a third consecutive month and reached the highest level since March 2014.

  • However, Eurozone inflation remained subdued at 0.2% below the 0.3% average predicted by economists and below the target rate set by the ECB. Falling energy prices continued to weigh on the headline rate.


  • Asian equity markets were mixed in December as investor confidence was rattled by further weakness in crude oil prices and the first US interest rate rise in almost 10 years.

  • Most of the region’s equity markets rebounded after initial weakness, except for Thailand where there is little confidence that the military led government will succeed in kick-starting the recovery.

  • China’s exports continued to contract, while imports picked up moderately. Results from manufacturing surveys were weaker than expected and continued to suggest contraction in this area of the economy, although non-manufacturing surveys remained in positive territory, suggesting expansion in the services sector. Further evidence of China’s two-speed economy.

  • Global emerging equity markets capped off a disappointing year by losing further ground in December. Lower commodity prices and currency weakness had a negative impact on equity returns from Russia and South Africa.

  • Taking 2015 as a whole, emerging equity markets had their worst year since 2011 with weakness exacerbated by currency losses.


  • The Japanese equity market was one of the best performing markets in 2015 but ended December lower as global macro-economic uncertainty increased and the Yen strengthened against other major currencies.

  • Revised data showed that Q3 GDP grew at an annualised rate of 1.0% rather than contracting by 0.8% as earlier reported.

  • The Bank of Japan’s view on the economy remains upbeat, suggesting that policymakers will leave the pace of asset purchases unchanged at least until January.


  • December was a disappointing month for bond markets with most sectors delivering negative returns.

  • According to data from Merrill Lynch, Gilts returned -1.1%. This compares to a return of -0.8% for sterling investment grade corporate bonds.


  • Commercial property remains a popular choice for investors and continues to provide diversity in portfolios.

  • Funds with strong rental income characteristics are preferred as this income provides a reliable boost to the overall return.

  • The IPD UK All Property Index returned 1.15% in December and 13.82% over the year ending 31/12/15.

And so far in 2016………

As you know, the above minutes focus on December 2015. However, you cannot have failed to have seen that markets have had a poor start to 2016…..

In the first two weeks of 2016, Frankfurt and Tokyo fell by double-digit percentages. In New York the fall was 9%, in London 8%. But the eye of the storm was China, where the main index in Shanghai lost 19% of its value in the same period.

The markets have been troubled by three issues:

The slowdown in China…So far, the official figures suggest a significant but not catastrophic slowdown in growth. After three decades of 10% average growth, according to the official figures just published. The trouble is that not everyone believes the “official figures” and that is causing uncertainty. The IMF's new assessment of the economic outlook predicts further easing of the pace. What is clear is that it is substantially slower than it was just five or six years ago.

The falling oil price…..good news for consumers and many businesses but this is awful for the sector and there are predictions that some oil companies may not survive, which would inevitably have an impact upon other sectors too. This will cause further uncertainty.

The strength of the Dollar……There are also risks from the strong dollar. The strength of the dollar is down to the fact that the US economy is recovering better than most of the developed nations, which in itself is good news for the US's trade partners - in other words, a lot of countries.

But there is a downside…..

The US recovery has led to the Federal Reserve's decision to raise interest rates last month and the widely shared expectation that it will take more such steps this year. These moves will be gradual, but the impact of the upward trend in US interest rates is already apparent. The prospect of higher returns in the US has encouraged investors to sell assets in other countries and buy dollars, pushing the currency higher. This will have ramifications in Emerging Markets, whose debts are often denominated in US dollars. This will undoubtedly be a cause for further uncertainty.

So, as markets hate uncertainty, they are reacting negatively at present, resulting in falling share prices. However, it is not all doom and gloom. Fund managers use times of volatility to top-up investments in high quality companies whose share prices have been slashed along with the rest. When the markets recover, which they will, these are the share prices that will react positively first. As we frequently say, the value of an investment is only crucial on the day you buy it and the day you sell it. If you are a long term investor with time to be patient to await the recovery, do so. Now is a time to hold one’s nerve.  

Date of next meeting:  24th   February 2016

Fraser Heath News

By Mark Fletcher 02 Oct, 2017
There used to be a time when the market would jitter at the slightest bad news story. Nowadays it seems that record breaking storms and a war of words amongst leaders with mass devastation at their fingertips can’t shake the nerves of investors. Which is not to say that markets have been driving forward (the FTSE 100 is, at the time of writing, where it was in the middle of January) but rather there hasn’t been the volatility we have seen in recent years.
By Mark Fletcher 05 Sep, 2017
It’s always the case that news stories like Brexit negotiations stalling, the actions of the North Koreans, the daily travails of the leader of the Western World, terrorist attacks and housing market slowdowns can grip us and make us fear the worst.
By Mark Fletcher 31 Jul, 2017
June was another good month for markets, in general terms, with many of the major developed markets once again flirting with new all-time highs. However, we have a sense that all may not be as it seems.
By Mark Fletcher 01 Jul, 2017
As we can see from the above commentary, markets generally continued to make progress in May despite plenty of uncertainty and conflict around the World.
By Mark Fletcher 01 Jun, 2017

Our reason for showing these graphs is to highlight that the VIX index is trading back at 2007 levels of low volatility while stock markets are at all-time highs. We can no more see the future than anyone else but we do know that when it comes to investing, the most money is often made when every sinew in your body is screaming that it is madness to invest, and that sometimes the opposite is true.

By Mark Fletcher 01 May, 2017
A mixed set of results this month reflects the fact that markets are waiting to see what happens in various political arenas around the Globe. Politics is definitely at the forefront of most news bulletins, whether it be President Trump's latest tweets, the UK government triggering Article 50 or the fight to become the next President in France or Chancellor in Germany.
By Richard Ellis 01 Apr, 2017

It has been a strong start to the year for investment portfolios, mostly driven by signs of continued strength in the US Economy and the promise of more to come under the Trump presidency. Markets always move ahead of the economy so to make money, investors will position portfolios to benefit from what they think is around the corner. But what if the promise does not materialise? One fund manager described this recent wave of enthusiasm as the “Trump Bump” and that this may well be followed by the “Trump Dump” if the new President is unable to deliver on his campaign promises due to lack of support from political colleagues. In this respect, it seems that the failed repeal of Obamacare has given investors pause for thought over the last week or so.

While some asset classes are looking expensive, on an individual basis, there remains optimism amongst fund managers. Those who particularly seek to invest in undervalued, unloved but robust companies can see plenty of scope for increased valuations in their investment pool.

Eight years have now passed since the FTSE 100 hit its Credit Crunch low point. In investor memory, particularly among younger investors, we are getting to the point when the slide that started in summer 2007 down to its nadir risks being forgotten. We don’t know what the future holds but the past tells us that investing needs time on your hands to ride out the tough times. We’re confident that investing remains the best long term strategy for your money but make sure that you understand the strategy you are taking and that your portfolio is right for your attitude to investment risk and your time frame.

By Richard Ellis 01 Mar, 2017

Markets made a much better start to the year compared to this time last year. However, investors remain wary of problems that are likely to rear their heads later in the year and so, in general, markets have paused for now. Politics seems likely to dominate sentiment again this year, with a number of key general elections to be fought in Europe, most notably in France and Germany. Volatility is likely to spike during these events. However, market volatility can be the friend of the active fund manager and in recent meetings and conference calls with managers many have expressed the view that there are plenty of good opportunities and are generally cautiously optimistic about prospects for the year as a whole.

Our view is that the strong equity returns we saw in the second half of 2016 are “in the bank”, as it were, so if markets do sell off at some point in the next few months, these profits can be eroded before we are worse off than we were before the EU referendum on 23rd   June 2016.  

By Mark Fletcher 31 Jan, 2017

The prospect of a protectionist Trump presidency and actions to spend their way to economic growth have led to a swing in investor sentiment towards those companies that will benefit from the US finally entering a period of strong economic growth.


  • UK equity markets continued to rise in December, ending an initially volatile year on a strongly positive note. On the back of a “Santa Claus” rally, the FTSE All-Share index closed the year at an all-time high.
  • As was so often the case in 2016, the mining and oil & gas sectors fuelled much of the rise; following agreement by OPEC members on a production cap, the oil price hit its highest level since 2015.
  • On the macroeconomic front –the Consumer Price Index (CPI) rose by 1.2% in the 12 months to November 2016, its highest level in two years.
  • Market expectations of the impact of Brexit in 2017 weighed on sterling, which faltered against the Euro and US Dollar into the Christmas period.


  • The fed raised the interest rate by 0.25% in December. It also announced its intention to raise interest rates three times in 2017, the central bank indicated that it would likely raise interest rates by 0.25% each time.
  • The post-US election rally saw the S&P 500 index hold onto the previous month’s gains to post solid returns of 1.98%.
  • Stock sectors, led by so called ‘defensives’, across the board recorded positive monthly returns
  • The US Manufacturing Purchasing Managers Index (PMI) hit a 21-month high.
  • US Manufacturers reported stronger hiring and higher prices for raw materials, which support other signs of labour market strength and higher inflation, pointing to improving manufacturing conditions.
  • December also saw consumer optimism about the state of the US economy increase to the highest level since August 2001
  • US GDP growth for the third quarter 2016 surprised markets with a better-than-expected growth rate of 3.5%.
  • Positive contributions to GDP growth came mainly from exports, private inventory investment, personal consumption expenditure and federal government spending
  • In a sign that the post-US election rally was expanding, investors regained interest in so-called ‘defensive’ sectors while profit taking by investors weighed somewhat on the performance of financials stocks
  • Healthcare shares lagged most other sectors during the month. In particular, biotechnology companies in the S&P 500 tumbled the most since October 2016 after Trump declared himself an opponent of high drug prices.


  • European equity markets advanced in December, posting one of the best monthly performances in 2016.
  • Markets surged in the aftermath of the Italian referendum, a political event which had been significantly weighing on sentiment over the last few months.
  • With the vote out of the way, market participants regained confidence amid increased talks of fiscal stimulus globally, aimed at spurring economic growth.
  • Within European markets, cyclical sectors (more sensitive to economic cycles) continued to perform strongly, reversing the trend observed in the early months of 2016 where deflationary fears dominated investment decisions
  • On the macroeconomic front, the month of December witnessed important decisions from central banks in Europe and overseas. Following its governing council meeting on 8 December, the European Central Bank (ECB) decided to extend its quantitative easing (QE) programme by 9-months, to the end of 2017, or beyond if necessary, until it sees a sustainable increase in Eurozone inflation towards the ‘below 2%’ target level


  • Returns from the MSCI Asia Pacific ex Japan Index in December were largely flat in sterling terms, although there was a notable divergence in performance between the region’s equity markets with Australia joining in the broader rally in developed markets, while Hong Kong and China were the notable laggards
  • Most Asian currencies continued to weaken relative to the US dollar with expectations that the US Federal Reserve will raise interest rates further in 2017.
  • Investor sentiment towards China was impacted by an apparent shift in policymakers’ focus from prioritising growth to concentrating on credit risks.
  • Higher commodity prices, particularly for crude oil and iron ore, helped support Australia’s equity market performance, which also benefited from further rotation into financials.
  • It was a quiet end to the year for global emerging equity markets although there was significant dispersion of performance between the regions.
  • The EMEA (Europe, Middle East and Africa) region came out on top with all countries here registering gains for December. The Russian equity market led the advance, drawing support from higher oil and gas prices.
  • Latin American equities treaded water for most of the month with most countries here trading flat, except Colombia which got a boost from an interest rate cut.
  • For the second consecutive month, the Russian equity market advanced strongly with the energy sector benefiting from the commitment of global oil producers to cut supply. Sentiment towards Russia was also enhanced by a belief that relations between the country and the US are set to improve in 2017 following Trump’s presidential election victory.
  • Russia’s inflation rate continued its downward trend in December with the annual CPI rate falling to 5.8%. While not enough to trigger any change in monetary policy, Russia’s central bank said it would consider an opportunity to cut interest rates during the first half of 2017.


  • The Japanese equity market ended the month higher in local currency terms. The market has rallied due to a better outlook for global growth in 2017 combined with yen weakness versus the US dollar post the US election
  • Macroeconomic data releases were generally positive over the month. The Bank of Japan upgraded its economic outlook stating that the economy has continued a moderate recovery trend, and maintained all components of its monetary policy.


  • The 10-year Gilt yield fell 18 basis points (bps) to end the year at 1.24%. US government bond yields were higher following the hike in US interest rates, however, the pace of the increase was more modest than recent months with the yield of the 10 year US Treasury rising 6bps to 2.44%. Given the more benign government bond market, corporate bonds outperformed.
  • Deutsche Bank announced it had agreed a US$7.2bn settlement with the Department of Justice. This is significantly below the US$14bn figure initially proposed in the summer and the market reaction to the news was positive.

What do we think?

Talk of the UK Government’s stance to not join the Single Market has weakened the pound further in recent weeks, leading to a continuation in the increase in the value of the overseas assets in portfolios and the earnings expectations of UK companies with overseas earnings.

The prospect of a protectionist Trump presidency and actions to spend their way to economic growth have led to a swing in investor sentiment towards those companies that will benefit from the US finally entering a period of strong economic growth.

This has been a bizarre bull run in investments since the October 2008 Credit Crunch, as price rises have been focussed on safe and secure investments, while the riskier investments that often trigger the exuberance at the end of an investment cycle have largely been ignored. The movement towards those stocks has seen some of the reliable heavyweight fund managers underperform of late with their riskier counterparts finally being rewarded. That this rotation into these stocks has been due to the promises of The Donald should give us all good reason to tread carefully.

Date of next meeting:      21st February 2017

By Mark Fletcher 22 Dec, 2016
What we are pretty confident about is that equity and bond markets are likely to be volatile in 2017 ahead of the negotiations between our Government and the EU and the myriad of other political and social issues that continue to dominate news headlines. It may be another year for investors to hold their nerve and let the storm pass.  
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