Fraser Heath Market Update
The UK stock market started 2016 in a volatile mood. The FTSE 100 Index hit its lowest level since 2012, driven by further weakness in the oil price and on-going concerns over the growth of the Chinese economy.
A 20% fall in the index on 20th January from its level of April 2015 marked a technical “bear market” and also its low point for the month. The FTSE 100 then rallied over the last 10 days of the month
Confirmation that the UK economy grew by 0.5% in the fourth quarter of 2015, giving growth of 2.2% for the year as a whole was in line with forecasts.
There were a number of positive trading statements from retailers, proof perhaps that the UK consumer, if not the UK stock market, is benefitting from lower fuel prices. Tesco, Sainsburys and Morrisons all announced better than expected sales for the key Christmas trading period, as well publicised price cuts and higher service levels saw them gain back some ground in the battle with the discounters.
Trading news from sectors whose fortunes are tied to energy and commodity prices was notably less upbeat. Royal Dutch Shell confirmed that annual profits would be below city forecasts
The US equity market had a gloomy start to the year. Fears of a slowdown in global economic growth were driven by concerns over China and plunging commodity prices. Markets were rattled in what some commentators likened to the volatility of the 1930’s.
At sector level, healthcare and financial stocks were the worst performers over the month. The performance of healthcare stocks was negatively impacted by biotech companies amid news of political criticism over medicine prices during the 2016 US presidential campaign.
Energy stocks rebounded as the oil price rallied amid persistent talk of cuts to crude oil output by oil-producing nations. Defensive sectors, utilities, telecoms and consumer staples were the only areas in positive territory.
Economic growth in the US came to a near halt in the final quarter of 2015 as GDP growth had slowed to an annual rate of 0.7%. The manufacturing sector is already considered to be in recession. Orders for durable goods fell 5.1% in December, the fourth drop in the past five months, bringing the annual fall to 3.5%, the largest decline outside a recession since 1992.
In corporate news, Apple reported the slowest growth in iPhone sales since the product’s launch in 2007, warning that sales would fall for the first time later this year.
Like other global markets, European equity markets had a poor start to the year. Encouraging central bank policy announcements helped to improve market sentiment in the second half of the month, recovering some of the earlier losses. Yet the rebound was not enough to bring markets back into positive territory.
All market sectors declined in January. The utilities sector dropped the least, followed by technology, with financials and basic materials being the biggest detractors.
On the macroeconomic front, the European economy continued to show signs of resilience. The unemployment rate dropped further to 10.5%, though this is a high figure relative to other developed markets.
Low levels of inflation and a weaker growth outlook in emerging markets led the ECB to underline its commitment to continue its monetary policy.
ASIA & EMERGING MARKETS
Asian equity market performance declined due to China’s economic slowdown, falling oil prices and uncertainty surrounding China’s currency management policy.
In terms of sector performance, financials and industrials fell the furthest, while the more defensive telecoms and healthcare sectors were the better performers.
China’s GDP grew 6.8% in Q4 of 2015 slightly down from 6.9% in the previous quarter, the slowest pace of growth since 2009.
India’s equity market suffered from Q3 corporate results, which highlighted a trend of weak revenue growth.
No emerging market region posted a positive performance in January although country performance was more contrasting with equity markets in Thailand, Malaysia and Indonesia registering gains.
Although equity markets in Europe, Middle East and Africa lost ground, country performance within it varied widely. Aside from the Greece, the biggest losers came from the Middle East. Despite weaker oil prices, the Russian equity market closed higher in Sterling (but not in US $) terms.
The Japanese equity market was one of the best performing markets in 2015 but Japan was not immune from global market volatility
In January equity markets ended the month lower, although not before a late stage rally promoted by the BoJ’s surprise decision to introduce negative interest rates.
The increase in investor risk aversion was driven by external factors such as concerns over the extent of China’s economic slowdown and further oil/commodity price weakness, which weighed on the outlook for Japanese corporate earnings.
The BOJ revised its growth and inflation projections downwards, before surprising investors with the introduction of a three-tier system of interest on deposits held at the central bank.
Volatility characterised the first month of 2016. Amid the uncertainty, high yield bond markets came under concerted pressure with yields rising to levels last seen in 2012.
Core government bond markets benefitted from the uncertainty along with continuing signs of low inflation and rhetoric from the ECB, BOJ and BOE and have delivered strong returns.
Government bond markets rallied with expectations of increases in both US & UK interest rates pushed out. As at the 31st January, the market was not expecting another hike in US interest rates to happen until December 2016. The first hike is UK interest rates is not expected until 2018.
According to data from Merrill Lynch, Gilts returned 3.9% This compares to a return of 0.6% for sterling investment grade corporate bonds.
NOTES FROM TELEPHONE CONFERENCE – 04.02.2016
WITH CARL STICK, MANAGER OF RATHBONE INCOME FUND
Carl is worried about BREXIT, China, Emerging Markets, US and will there be inflation or deflation?
Zika virus – how does this impact?
More worrying is QE – economy is being propped up but this can’t continue
The market is volatile with extreme price swings in some stocks
There are not many safe places to hide
The market is aware of oil/commodity problems
Carl manages the fund by focusing on risk management and balances the risk across the portfolio
His process is clear, rational, robust, easily repeatable and disciplined
He aims to minimise risk and maximise returns
Dividends from the fund have increased in 22 of the last 23 years – tangible reward for long term ownership. The aim is to give investors a “pay rise” every year
Total return since 1970 is 5% per annum if dividends reinvested, this reduces to 2% per annum excluding reinvested dividends
170% of 267% total return since 2000 has been from dividends. The return from the FTSE All Share is just 87% for the same period
What do we think………
There are always things going on in the world that can make us worried about their impact on investments. At the moment investors are worrying about China slowing down, falling oil price (despite that being good for consumers), strength of one or two European banks, and a potential Brexit. Added to the mix is the psychological issue that investors know that after a bull run like we've had since March 2009 there's always a bear run; a mind-set that can be a self-fulfilling prophecy. We are now in bear market territory with the value of shares having fallen over 20% since May last year.
However, if we wait for there to be no troubles in the world we will always be waiting. There has always been something that could bubble over into a problem. There are fund managers who see the recent sell-off as a healthy return to investors starting to get choosy; this can throw up good buying opportunities for good managers. And there's still the fact that the US economy, and ours to a lesser extent, is looking healthy with full employment and strong economic growth.
The man who tells you he can see the future is a man not to be trusted. So we can't promise that it won't get worse before it gets better. But we can reassure you that your money is being really well looked after by the fund managers you're with and that barring something happening that has never happened before, the money that you know you won't need to spend over the next few years should give you a better return invested than if you had it in cash.
Date of next meeting: 23rd March 2016
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 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.
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.
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.
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.