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Investment Committee Meeting Minutes - February 2017

  • 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.  

UK

  • The FTSE All Share index rallied through the first half of January but fell by the month-end, broadly in line with the US dollar, which weakened against sterling following Donald Trump’s inauguration. This correlation was more pronounced for the UK’s blue chip FTSE100 index due to the high proportion of US dollar denominated earnings among its constituents.
  • Cyclical sectors continued to outperform, continuing the trend established throughout the second half of 2016, with financials and materials the best performers in January.
  • Expectations of increased global infrastructure spending spurred gains for UK-listed mining companies, notably Glencore and Anglo American, while increased nervousness around the new look US administration prompted a rise in gold prices, as gold is perceived to be a safe-haven for investors through periods of increased uncertainty.
  • UK GDP rose 0.6% in the fourth quarter of 2016, exceeding expectations, driven principally by continued service sector growth and consumer spending. UK inflation hit 1.6% in December, as consumer prices rose 0.5% in the month, the highest rate since June 2014. Mark Carney warned that policymakers have little tolerance for above-target inflation levels.
  • Corporate news flow picked up through the month with some notable merger and acquisition activity. Reynolds American accepted a revised US$49.4bn cash and shares offer from British American Tobacco; they will acquire the remaining 57.8% of Reynolds that it doesn’t already own.
  • Wholesaler Booker Group accepted a £3.7bn bid from Tesco which will extend the supermarket’s reach across the country’s fast-changing food industry.

 

US

  • US stock market indices reached new all-time highs on the back of President Trump’s action filled first week in office. The rally cooled off towards month end as investors paused to reassess the wider impact of President Trump’s extensive policy proposals. Nevertheless, the S&P 500 index managed to extend it run of positive monthly gains, returning 0.08% (total return, sterling) in January.
  • At sector level, stocks in better performing materials and consumer discretionary sectors led returns, while most others were essentially flat, with telecoms and energy lagging.
  • The US commerce department readings showed that the US economy continued to expand, with GDP growing, albeit somewhat slower, at a 1.9% annual rate in the fourth quarter of 2016. Supported by a rise in wages, US consumer spending increased in December as households bought more durable goods, especially automobiles. Cold weather boosted demand for utilities.
  • Steady consumer spending and rising business investment suggested that the economy would continue to expand at a healthy pace in 2017. While the housing market continues to recover and support the economy, economists only see a modest impact on home sales from higher mortgage rates, as the tightening labour market starts to boost wage growth. Data from the US department of labour showed US wage growth accelerated in December at the quickest pace since 2009.
  • Although wages have been far slower to recover, December’s jump in hourly earnings was the first real sign that strong job growth was beginning to push wages higher. Yields on 10 year US treasuries spiked after the employment data release signalled that investors are starting to become concerned that the economy is heading towards a period of higher inflation for the first time since the financial crisis.
  • In corporate news, manufacturers enjoyed a strong start to 2017 with new order growth accelerating to a 28-month high, with data indicating a robust improvement in overall business conditions across the US.

 

EUROPE

  • In local currency terms, European equity markets remained flat in January. Investors paused to weigh up policies announced by the new US administration and their potential impact on the global economy.
  • Cyclical sectors continued to perform better than other areas amid rising growth and inflation expectations. The industrials sector was the stand-out performer whilst oil and gas utilities led the detractors.
  • From a macroeconomic perspective, the recovery in the Eurozone region showed further signs of strengthening. The latest economic confidence index jumped to the highest level since 2011 and the Eurozone unemployment rate dropped to 9.6%, a level not seen since May 2009.
  • Eurozone headline inflation rose to 1.8% in January, (highest level since February 2013) exceeding the 1.5% expectations. The change was largely due to the rise in global energy prices compared to last year. Nevertheless, this is expected the intensify the debate around the degree of monetary stimulus and bring into question the future of the ECB’s quantitative easing.

 

ASIA & EMERGING MARKETS

  • Most Asian equity markets started off the year strongly, as investors focused on hopes for increased fiscal spending in the US and improving global growth. There was a divergence in performance between markets, with Hong Kong being a notable outperformer. From a sector perspective, cyclicals fared well, with materials achieving strong gains, while defensive sectors, such as consumer staples, lagged.
  • China’s equity market was supported by better than expected fourth quarter GDP year-on-year growth of 6.8%
  • The Indian equity market recovered from December lows, supported by rising expectations for an expansionary budget and fading concerns about a potential slowdown in growth due to demonetisation.
  • Emerging equity markets enjoyed a positive start of the year. All emerging market sectors posted positive results with materials, technology and consumer discretionary leading the gains.
  • Most emerging market currencies also traded higher as the US dollar lost some of its recent shine.

 

JAPAN

  • The performance of Japan’s equity market was flat in January in local currency terms, after a strong finish to 2016, with growing concerns surrounding Donald Trump’s presidency.
  • While the yen strengthened relative to the US dollar after a period of weakness, the performance of economically-sensitive sectors in the equity market was supported by solid overseas economic indicators. Japan’s exports rose in December for the first time in 15 months on the back of strong sales of electronics and car parts.
  • Household spending was also better than expected, while the Bank of Japan revised its growth forecast for 2017 from 1.3% to 1.5% and its 2018 growth forecast from 0.9% to 1.1%

 

FIXED INTEREST

  • After moderating in December, the sell-off in bond markets resumed in January.
  • The Eurozone’s improving economic data led Eurozone bond yields higher, with French, German, Austrian, Italian and Spanish Government bonds all now at 12 month highs.
  • Gilt yields were also higher, with the 10-year yield rising from 1.24% to 1.42% over the month.
  • The US market, which led the sell-off in the final months of 2016, was more subdued, with the 10 year US Treasury yield rising just 1 basis point to 2.45%
  • The weakness in government bond markets in turn weighed on corporate bond markets, with negative returns in the more interest rate sensitive investment grade bond markets.
  • According to data from Merrill Lynch, Gilts returned -1.8% with sterling investment grade corporate bonds returning -1.0%


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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