Fraser Heath Logo | Independent Financial Advisors Bristol


Investment Committee Meeting Minutes - December 2017

  • By Mark Fletcher
  • 03 Jan, 2018

The UK equity market retreated in November, only the second month in 2017 where we saw a meaningful fall in the key FTSE 100 Index. Comments made by Mark Carney, following the November Base rate rise, highlighted the Bank’s view that inflation will be a problem for some time to come and how business and consumers react to this will determine the path for the UK economy over the coming months. The Bank said in a statement: “The decision to leave the European Union is having a noticeable impact on the economic outlook.  

Covering the Month of November 2017  

UK  

  • The UK equity market fell in November as continued uncertainty in domestic politics weighed on confidence in the UK’s economic outlook

  • At the start of the month, the Bank of England implemented the first interest rate rise in a decade; the central bank’s Monetary Policy Committee (MPC) voted seven to two to increase the UK interest rate to 0.5%, prompting some UK high street banks to increase charges on mortgages and loan products.

  • Sterling strengthened against the US dollar through the course of the month, while oil prices continued to rise after breaking through the US$60 barrier.

  • Economic data provided mixed signals for the UK economy; data from the all-sector Purchasing Manager’s Index, which provides indication of the economic health of the private sector, saw business activity across services, manufacturing and construction grow at its fastest rate for six months during October.

  • Conversely, UK retail sales growth weakened as in-store sales of non-food items fell sharply in the three months to October, partially offset by a strong rise in food pricing.

  • UK inflation remained at its highest level in five years, with the consumer price index rising 3% over the year to October. In the Autumn Budget, Chancellor Phillip Hammond announced that the Office of Budget Responsibility had revised down the UK economic growth outlook for this year and for the next five years. 

US  

  • The US equity market ended November near all-time highs amid optimism about economic growth and company earnings. The S&P 500 Index reached the 2,600 mark for the first time towards the end of the month, crossing its fourth round-number milestone this year.

  • Progress over US tax reform prompted a rotation out of technology stocks, the year’s best performing sector, and into firms seen to benefit the most from a potential reduction in the corporate tax rate, such as banks.

  • Consumer stocks saw the strongest gains in the month as retailers hit record highs on Black Friday and got the holiday selling season off to a robust start. Preliminary data showed that there was US$640m in online spending as at 10am in New York on Black Friday, up 18.4% on the previous year.

  • The share price of Amazon hit new highs, crossing the US$1,200 a share mark for the first time.

  • In terms of macro-economic news, third quarter gross domestic product growth was revised upwards – it climbed at an annualised rate of 3.3%, up from the previously reported 3%.

  • “The economic expansion is increasingly broad based across sectors as well as across much of the global economy,” Federal Reserve (Fed) chair Janet Yellen told the Joint Economic Committee. 

EUROPE  

  • European equity markets retreated in November after two consecutive months of gains.

  • Among market sectors, utilities were the leading outperformers, as higher coal prices led to a bounce in power prices and corporate earnings expectations. The health care sector was another top performer in November.

  • Meanwhile, the telecommunications sector led detractors, followed by oil and gas.

  • On the macroeconomic front, the European economy continued to be characterised by a strong growth and modest inflation environment.

  • Private sector surveys continued to power on, showing activity indicators in France, Germany and the eurozone, already at multi-year highs, expanding further and beating expectations. The pick-up remained board-based with rates of output growth similar in both the manufacturing and services sectors of the economy.

  • Data also showed eurozone companies creating jobs at the fastest pace in 17 years and enjoying the most synchronized expansion since before the single currency was founded. The 19-nation bloc has seen unemployment rate drop to 8.8%, the lowest in almost nine years.

  • Policy makers have expressed confidence that economic growth and falling unemployment will eventually feed through to prices, as the slack in the economy wanes. 

ASIA & EMERGING MARKETS  

  • Asian equity markets were mixed over the month post strong gains year-to-date. The Chinese and Hong Kong equity markets were notable outperformers as investor sentiment was boosted by an upbeat third quarter earnings season.

  • A meaningful correction in the global technology sector over the second half of the month, which saw share prices fall back into line with market expectations, had an adverse effect on the tech-heavy Taiwanese equity market, as investors globally took profits in technology stocks and rotated into other sectors.

  • Elsewhere, Indian equities declined as India’s fiscal deficit sparked fears about the achievability of fiscal consolidation. This was despite an upgrade of its sovereign rating by Moody’s on the back of expectations that progress on economic and institutional reforms will enhance the country’s growth potential and reduce the Government’s debt burden.

  • Emerging equity markets eked out a modest gain over the month. Among the regions, EMEA outperformed, while Latin America underperformed. Sentiment towards Latin America was soured by political issues in Chile and Brazil the two weakest performing equity markets.

  • From a country perspective, South Africa and Russia came out on top, with Chile and Turkey being the laggards.

  • For the first time this year, the technology sector failed to gain ground. Utilities and energy also generated negative returns for November, while the best performing sector was consumer discretionary. 

JAPAN

  • Japan’s equity market ended November higher, thanks in part to the supportive global macroeconomic backdrop and a solid set of quarterly corporate earnings with positive earnings revisions, particularly from manufacturers of electric machinery and precision instruments.

  • Economic data for Japan continued to show gradual improvement. The first preliminary estimate of third quarter GDP growth was 1.4% annualised, suggesting a seventh consecutive quarter of expansion. 

FIXED INTEREST  

  • In broad terms, November was a risk-off month, with higher quality (less risky) parts of the bond market outperforming more high-risk areas.

  • High yield bonds came under pressure mid-month.

  • The demand for income and still strong fundamentals meant that some of these losses were quickly recovered in the second half of November

  • At the start of the month the Bank of England, as widely expected, hiked UK bank rate by 0.25%, taking the rate back to its pre-referendum level of 0.5%. The hike was accompanied by some accommodative statements. The market does not now expect another hike until late 2018.

  • In government bond markets, there was a steep rise in the yield of US government bonds, with shorter time periods to maturity. As a result of the rise, the difference in yield between short and long dated US Government bonds has also fallen – a so called ‘flattening’ of the yield curve. The spread between maturities in the US market is now, in some cases, at its lowest level since 2008.  

 

What do we (and the Bank of England) think?

As is noted in the market round-up, the UK equity market retreated in November, only the second month in 2017 where we saw a meaningful fall in the key FTSE 100 Index. Comments made by Mark Carney, following the November Base rate rise, highlighted the Bank’s view that inflation will be a problem for some time to come and how business and consumers react to this will determine the path for the UK economy over the coming months. The Bank said in a statement: “The decision to leave the European Union is having a noticeable impact on the economic outlook.  

“The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling. Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.”   

“And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.”

“There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal."

We are, of course, in unchartered territory and there will inevitably be many more twists and turns in the road to Brexit before we reach 29th March 2019. Even then, with no guarantee of a fully-formed deal, the uncertainty may well continue beyond the official leaving date. Having said that, there are pockets of the economy that are doing well and, although the broader markets may not make much progress in the foreseeable future, active fund managers seek to identify sectors and stocks within them that are forging ahead. Therefore, despite a challenging backdrop, we remain confident about medium term prospects for the UK.  

Elsewhere, the passing of Donald Trump’s tax reforms has helped sentiment in the US market and prompted some very encouraging comments from the chair of the Fed. Strong growth and low inflation continues to act as a helpful backdrop to European equity markets and this is an area where we are optimistic about near term prospects. Similarly, we are encouraged by prospects for Japanese equities and it is significant that many global equity managers, who of course can usually select stocks from anywhere in the World, also favour Europe and Japan at the present time. Investors in Fraser Heath model portfolios will therefore have a healthy exposure to these areas. 

 

Date of next meeting: 18th January 2018

Fraser Heath News

By Mark Fletcher 03 Jan, 2018

The UK equity market retreated in November, only the second month in 2017 where we saw a meaningful fall in the key FTSE 100 Index. Comments made by Mark Carney, following the November Base rate rise, highlighted the Bank’s view that inflation will be a problem for some time to come and how business and consumers react to this will determine the path for the UK economy over the coming months. The Bank said in a statement: “The decision to leave the European Union is having a noticeable impact on the economic outlook.  

By Mark Fletcher 22 Nov, 2017

The Bank of England’s decision at the start of November to raise interest rates for the first time in 10 years was widely expected and caused little initial stir in the markets. Since then the FTSE 100 has fallen a couple of percentage points at the time of writing. Perhaps the combination of negative talk around Brexit combined with the prospect of rising interest rates are starting to bring back a little fear to the market which has, for some time, felt like it has been in a state of complacency.

By Mark Fletcher 01 Nov, 2017

Most commentators expect interest rates in the UK will rise for the first time since July 2007 when the Monetary Policy Committee (MPC) of the Bank of England next gets together for its monthly meeting on 2nd November 2017. Indeed, Mark Carney said on the BBC Today programme, shortly after the minutes of last month’s meeting were released, “What we have said is that if the economy continues on the track that it has been on - and all the indications are that it is - in the relatively near term you can expect that interest rates will rise”. He went on to say, “We are talking about just easing a bit off the accelerator to keep with the speed limit of the economy”, which has been widely predicted to mean that rate rises will be gradual and measured.

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.

More Posts
Share by: