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Investment Committee Meeting Minutes - December 2016

  • By Mark Fletcher
  • 22 Dec, 2016

The FTSE 100 Index of our leading companies by size has recently nudged above 7,000 points, suggesting that equity prices of major companies are on the high side. This has strengthened our view that smaller and medium-sized companies may well offer better growth prospects than the top100 companies in the next year or so.

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.  

Market update

UK

  • UK equity markets and government bond yields rose in response to the surprise result of the US Presidential election, expecting higher rates of government spending and lower taxes to provide some tailwinds to global economic growth.
  • In his autumn statement, Chancellor Philip Hammond announced the creation of a £23billion national productivity investment fund and raised borrowing forecasts over the five years to 2020-21
  • Economic data confirmed headline UK consumer price inflation below 1% in October, weighed down by continued deflation in clothing prices. Preliminary estimates of GDP indicated 0.5% growth during the third quarter of 2016, supported by export growth and consumer spending.
  • The FTSE All Share Index fell during the month and the rotation into value sectors continued, with financials and materials performing strongly while consumer staples lagged.
  • Corporate news was headlined by third quarter results from BP who reported a near 50% fall in third quarter profits, citing a “weaker price and margin environment”. In contrast, Royal Dutch Shell posted an 18% increase in profits for the same period, but also identified the ongoing challenge of lower oil prices and an uncertain outlook.


US

  • Donald Trump’s unexpected win of the Presidential election took markets by complete surprise. The initial response was a fall in markets, however the post-election rally led all three major US stock indices to all-time highs. Overall the S&P 500 index posted solid returns of +3.7% and remained positive year-to-date, returning +9.79% (both total returns in US dollars)
  • In a sign that the US economy is gaining speed, revised third quarter US GDP came in at an annualised rate of 3.2%, an increase from the previously reported 2.9% This data confirms that the US economy expanded in the third quarter at the fastest rate in two years. It was in part supported by a sharp rise in exports, continued strong consumer spending and an increase in spending by the federal government.
  • November’s reading from the Index of Consumer Sentiment came in at 93.8, above analysts’ 91.6 estimate. The improving mood was bolstered by a brightening jobs situation – a high last seen in February 2008.
  • With the earnings season in full swing, 71% of the 490 S&P 500 companies that had reported earnings results as at 29th November had beaten earnings estimates. Among the estimate-beating sectors, financials and technology stood out as both saw a relatively high percent of companies exceeding analysts’ expectations.


EUROPE

  • European equity markets remained broadly flat in November in local currency terms. Markets fell in sterling terms as the euro underperformed relative to sterling.
  • With the US election out of the way, investors’ attention focused on events in Europe, starting with the Italian referendum.
  • The sector rotation in European equity markets, away from defensive areas into cyclicals, continued. The exception was the healthcare sector which, while seen as a defensive area, rallied strongly post Trump victory on the prospects that headwinds from the heavy regulations proposed by Hillary Clinton would now dissipate.
  • Eurozone unemployment dropped to the lowest level since 2009 signalling that companies are confident in the region’s slow but steady recovery.
  • Eurozone inflation continued to increase moving to 0.6% in November from 0.5%. Core inflation (excluding food and energy) remained stable at 0.8%


ASIA & EMERGING MARKETS

  • Investor sentiment in Asia suffered from uncertainties post US election.
  • There was divergence in performance between markets, with China’s equity market being a notable outperformer. At the sector level, cyclicals fared better than defensives. Financials outperformed while consumer staples lagged.
  • China’s economic data was mixed, as consumption growth disappointed due to slowing auto and residential sales growth, while fixed investment growth was better than expected (year-on-year).
  • The Taiwan equity market suffered from concerns over the potential impact of any protectionist measures on the export-dependent technology sector, while in South Korea political turmoil persisted.
  • India’s prime minister Modi made a surprise announcement to de-monetise high denomination bank notes, which will force a reduction in the size of the cash-based black market. In the long term this will improve tax compliance and lead to a reduction in India’s fiscal debt, but it still caused a market sell off.
  • Concerns about Donald Trump’s immigration policies soured confidence towards emerging equity markets. Performance varied greatly between countries with Egypt, Turkey and Mexico leading the losses, with Latin America being the weakest regional performer.
  • Meanwhile Russian equity markets gained ground drawing support from a rising oil price.


JAPAN

  • The Japanese equity market ended the month higher in local currency terms buoyed by a weakening Yen versus the US dollar post the US election.
  • The consumer price index rose 0.1% the first year-on-year rise in eight months, while third quarter GDP data of 2.2% growth exceeded expectations at 0.8%.
  • This data relieved some pressure on the BOJ’s monetary easing programme and in combination with the government’s new fiscal measures provided support to the Japanese equity market.
  • The monetary easing environment, combined with the potential for US rates to rise in the short term, have reduced the risk of further yen appreciation. This has helped currency sensitive sectors such as Japanese exporters to outperform.


FIXED INTEREST

  • The recent weakness in government bond markets continued in November. US Treasuries saw the biggest move with yields on the 10 year treasury rising from 1.83% on 31st   October to 2.41% on 30th   November. Other government bond markets followed the US, with UK Government Gilts rising from 1.28% to 1.45% and 10 year German Bund yields rising from 0.16% to 0.30%.
  • In the Autumn statement, Chancellor Philip Hammond announced that the Government will borrow an extra £20.6 billon during the fiscal year 2016/17, funded via Gilt sales. From 2018 onwards the Government will borrow an extra £20-30 billion. This additional supply added to pressure on the Gilt market.
  • The weakness in government bond markets fed through to the wider bond market with investment grade corporate bonds underperforming parts of the market with higher credit risk such as high yield.
  • US commentators believe that expectations of a December US interest rate hike are fully priced into bond markets.


What do we think?

As we alluded to in the conclusion to our minutes last month, prices of fixed interest securities continue to fall in response to rises in interest rates in the sector. When the interest rate for the bond (the coupon) rises, so the price of the bond falls. With the UK Chancellor having announced plans to issue more Gilts in his Autumn Statement, we should anticipate that bond prices will fall further from this point. In the meantime, the FTSE 100 Index of our leading companies by size has recently nudged above 7,000 points, suggesting that equity prices of major companies are on the high side. This has strengthened our view that smaller and medium-sized companies may well offer better growth prospects than the top100 companies in the next year or so.

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.  


Date of next meeting:      19th   January 2017

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

  • 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.


US

  • 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.


EUROPE

  • 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


ASIA & EMERGING MARKETS

  • 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.


JAPAN

  • 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.


FIXED INTEREST

  • 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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