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Investment Committee Meeting Minutes - July 2015

  • By Richard Ellis
  • 22 Jul, 2015

Greece's financial debt problems have dominated the political news over the past few weeks and this has also had an impact on investment markets. While at the time of writing a solution appears to have been agreed, this is clearly a fluid situation, the outcome of which remains uncertain.

Fraser Heath Market Update


UK


  • Market sentiment during June was dented amid fears of a Greek exit from the Euro, a slowing Chinese economy and the ever nearing prospect of an interest rate increase in North America.
  • The FTSE All Share Index, having rallied following the general election in May, is now some 6% off its April all-time high, finishing the month down 5.8%  Large cap stocks fell more sharply than the smaller counterparts, with the FTSE 100 index showing a decline of 6.4% versus 3.3% for the FTSE Mid 250.
  • The resilience of the growth outlook for the UK economy has been reflected in a much stronger outlook for domestically-focused companies. For these companies aggregate earnings estimates have been stable, with consensus 2015 earnings estimates being revised down by just 1-2%.  Reflecting this, the FTSE 250 index has risen by three times more than the FTSE100 index so far in 2015.
  • In the short term, UK equity markets are likely to be sensitive to developments in the US policy conditions as an increase in interest rates before the end of the year seems more likely than not.
  • At stock level, BT was one of the few large cap companies to generate a positive share price return over the month, arguably reflecting its strong cash generation and upbeat final results that highlighted a prospective 14% rise in its final dividend

US


  • The escalating Greek debt crisis negatively impacted the US equity market with the S&P 500 returning -1.9% (in US $ total return terms) in June.
  • Sector performance was led by consumer discretionary stocks which benefitted from a rise in US consumer spending.  
  • Figures showed that US consumers emerged from a long winter and headed for the shops.  Consumer spending data shows the biggest gain in six years driven by strong employment data, persistently low petrol prices and rising wages. The retail figures were seen as crucial to those building a case for the Fed to GO ahead this year with what could be the first interest rate RISE in NINE years.
  • While economic activity has been expanding moderately, the Fed lowered its forecast for 2015 growth to 1.8-2% compared to March 2015, when it saw economic expansion of 2.7%  Janet Yellen explained that any move to increase interest rates would be gradual.  She said that there would need to be more decisive evidence that a moderate pace of economic growth will be sustained.

EUROPE


  • European equity markets retreated in June amid several rounds of fruitless negotiations between the Greek government and European creditors at the IMF.  The FTSE World Europe (Ex UK) Index fell 4.3% (in Euro total return terms)
  • At sector level, telecoms were the best performer followed by financials, which showed some resilience relative to other sectors, as many investors saw limited Greek contagion via the banks, thanks to the policies put in place by the ECB.
  • Despite the protracted Greek situation, the European economy continued to show good signs of recovery.  Economic indicators from surveys of private companies were the most positive since 2011.
  • The view among commentators is that the risk of collateral damage to the economy and companies in the rest of Europe, should the Greek exit become reality, has substantially been reduced.  The governance architecture of the Eurozone is now noticeably more secure and the private sector inter-linkage between Greece and the rest of the Eurozone has substantially shrunk relative to several years ago.

ASIA & EMERGING MARKETS


  • Asian equity markets were broadly weaker after a period of strong performance earlier in the year.
  • China’s equity market corrected following concerns over economic growth.  The People’s Bank Of China cut its benchmark interest rate and one year deposit rate by 25 basis points in an attempt to stabilise market sentiment.
  • Elsewhere, both the Indonesian and South Korean equity markets were down, while one of the better performers in the region was the India equity market.  Industrial production growth recovered to an average of 3.6% y-o-y compared to 1.9% in 2014 while a 25 points interest rate cut was seen supportive to consumer spending.
  • Brazil was the only regional winner in Latin American equity markets, with sentiment towards them seemingly enhanced by a belief that the government is committed to an orthodox policy agenda and that it is prepared to take difficult decisions to improve long term prospects of the economy.  Interest rates were raised by a further 50 basis points to 13.75%, their highest level since December 2008, in response to inflationary pressures.

JAPAN


  • The Japanese equity market ended the month lower, the first monthly decline of 2015 as investor sentiment was negatively impacted by the standoff between Greece and the EU.
  • More economically sensitive areas of the market underperformed, particularly the iron & steel and mining sectors.  The retail trade sector performed best, with further evidence of an increasingly competitive labour market strengthening expectations that domestic consumption will grow.
  • Despite volatility in macro indicators, Japan’s outlook for economic growth remains positive.

FIXED INTEREST


  • June was a challenging month for bond markets with both government and corporate bond markets lower than at the same point in May 2015.
  • After showing some signs of stabilising at the end of May, German Bunds again sold off aggressively at the start of June.  The yield on the 10 year Bund increased by nearly 40 basis points in the first three days of the month rising from 0.49% on the 31st May to 0.88% on 3rd June.  It then stabilised again finishing the month with a yield of 0.76%
  • According to data from Merrill Lynch, Gilts returned -1.9% while Bunds returned
  •  -2.1%   Greek government bonds returned -21.8%  Sterling investment grade corporate bonds returned -2.8%


WHAT DO WE THINK


Greece's financial debt problems have dominated the political news over the past few weeks and this has also had an impact on investment markets. While at the time of writing a solution appears to have been agreed, this is clearly a fluid situation, the outcome of which remains uncertain. We have seen increased volatility in European stock markets but it is notable that the fluctuations have only been a few percent in either direction. This seems to backup the consensus view that we hear from fund management groups that with European banks now in a much stronger position and with Greece's economy only representing 2% of the Eurozone economy that the short term impact of Greece's decision one way or another will not be too significant on the global economy. This is not to say that it might not have some long term ramifications but there is a sense that fund managers are not too greatly concerned.

Of more concern has been the significant correction in the Chinese stock market which has fallen over 30% from its peak to its trough in the past month. A number of factors have contributed to this which mainly relate to the fact that the Chinese stock market had become overheated and valuations highly stretched. While the Chinese government attempts to stabilise investment markets by suspending them this has so far not calmed the nerves. While clients with a high exposure to emerging markets will have suffered losses in recent weeks this will hopefully for most be compensated by having enjoyed a strong return that preceded the rise. There remain a number of fundamental issues that may still need to be addressed before the Chinese stock market looks like a sure investment but for those with both the nerves and a long-term investment horizon the recent correction may well have presented a buying opportunity.

The issue of when the Federal Reserve will increase interest rates continues to be a topic for debate and so far the market has been right to expect interest rates to rise at a later date than occasionally indicated by Janet Yellen. While the Americans want to raise interest rates before the end of the year this is still contingent on the central bank seeing stronger economic growth in jobs and earnings. The fragility of the recovery means that central bankers are at pains to ensure that the economy is not derailed but there is also a growing view that if interest rates are not brought up in the near future that it will mean that the Fed does not then have the ability to lower interest rates again in the future when economic conditions inevitably worsen.

The prospect of interest rates continuing to remain low for a sustained period of time will lead investors to keep questioning whether they can enjoy a better return on their savings than keeping it in a bank deposit account. The closure of the National Savings & Investment Pensioner Bond after the election means that savers looking to take no risk with their capital are left with very poor pickings. Investors with time on their hands and who can cope with the short-term fluctuations that come with having an investment portfolio may continue to choose to invest rather than to save in cash and this might provide continued support for investment markets for some time to come.


Date of next meeting 26th August 2015

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