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Investment Committee Meeting Minutes - July 2017

  • 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.

Covering the Month of June 2017


  • The UK equity market looked set for another turbulent month following the surprise outcome of the general election

  • Sterling fell sharply on news of the result, echoing the dramatic moves in currency markets following last year’s vote for Brexit

  • The move in currency put pressure on the share prices of companies perceived to be closely correlated with the UK economy, resulting in some divergence in the performance of internationally exposed companies relative to more domestically oriented businesses. However, these moves were noticeably less violent than those seen post-Brexit and followed some recovery of domestic stocks year-to-date

  • The Monetary Policy Committee (MPC) voted by a majority of 5-3 to maintain interest rates at 0.25% in June, a significant narrowing from the 7-1 vote for no action seen in May

  • Just 1.7% of household income was left unspent in the first quarter of the year – the lowest savings ratio since records began in 1963 – raising doubts over consumers’ ability to bolster economic growth in the months ahead. The latest UK retail sales report added to these fears, as retail sales contracted by more than expected, falling 1.6% in May


  • The US equity market held on to gains over the month of June despite a rise in volatility as investors assessed the impact of the US Federal Reserve (Fed) raising interest rates

  • The Fed voted to raise interest rates by 0.25%, the second increase this year, bringing them to their highest level since 2008. It also confirmed its forecast for a further increase this year and three more in 2018

  • US Fed chair Janet Yellen signalled that the US economy would be able to withstand higher interest rates, though there were signs that the outlook for the US economy was mixed. While the rise was widely anticipated given a backdrop of low unemployment, other economic indicators, including inflation expectations, have been weaker

  • The US Department of Labor reported that prices for goods, excluding food and energy, increased by 1.7% from May 2016, slowing steadily from earlier in the year. The weakness in inflation has added to signs that the US economic growth rate may be slower than forecast

  • Technology stocks, the strongest performing sector of the year so far, saw share prices fall more than any other sector over the month

  • Crude oil tumbled into a bear market territory on concerns that a global supply glut would persist. The fall in oil then dragged down the share price of energy stocks

  • While the share prices of technology and energy stocks remained under pressure, financials, and banks in particular, were supported in the wake of higher interest rates, to become the strongest performing sector over the month 


  •  In local currency terms, European equity markets retreated in June. The month was marked by monetary policy headlines as the three major central banks – European Central Bank (ECB), Bank of England (BoE), and US Federal Reserve (Fed) – all held policy meetings
  • The ECB kept its interest rate policy unchanged. Yet the key development was the subtle changes in guidance and forecasts. The ECB dropped its guidance that interest rates might fall further, saying that it now expects borrowing costs to stay at present levels for an extended period

  • In addition, previous wording in the ECB introductory statement characterised the risks faced by the economy as tilted to the downside; this was modified to indicate that risks are now broadly balanced given the pick-up in growth. Nonetheless, the ECB warned that inflation levels remained subdued, requiring continued easing in monetary policy

  • In terms of forecasts, the ECB marginally raised its 2017 euro-area GDP growth projections to 1.9% from 1.8%, while reducing its 2017 inflation projections to 1.5% from 1.7%  


  • Asian equity markets continued to rally in June, with Taiwan, Korea, India and Indonesia all hitting new record highs. Taiwan benefited from the strong performance of its tech sector, while Korea’s gains were supported by positive earnings revisions and reduced political uncertainty

  • In China, economic indicators for May suggested a steady near-term growth path

  • Australia’s equity market lagged, with the energy sector the biggest drag on performance as the oil price weakened, while a pick-up in bond yields led to a sharp selloff in real estate investment trusts  


  • Emerging equity markets extended their winning ways by advancing higher in June, edging past developed markets for the sixth month in a row

  • An improving economic landscape and some upbeat earnings results provided a comforting backdrop with most emerging market currencies holding steady despite US interest rates being hiked for the third time in six months

  • Emerging Asia was the best performing region, led by the tech-heavy equity market of Taiwan

  • The biggest sector gains within emerging markets were technology and healthcare, with the slump in oil prices having a negative effect on energy stocks

  • In EMEA (Europe, Middle East and Africa), strong performances from Greece and Turkey could not offset weakness from Qatar, Russia and South Africa

  • The knock-on effect of lower energy prices was felt in Russia, which was the weakest performing equity market in emerging Europe 


  • Japan’s equity market ended the month higher, with solid earnings expectations providing support

  • The defensives sectors had a strong start to the period, but a cyclical rally towards the end of the month, driven by recovering commodity prices, resulted in the cyclical areas (those more sensitive to economic cycles) outperforming the more defensive sectors

  • The Japanese equity market is becoming increasingly corporate earnings driven, with the recent results season for the year ending March delivering record earnings and dividends  


  • The main story for bond markets this month was a shift in tone from the world’s major central banks. The ECB and the BoE both spoke about reducing the amount of economic stimulus they are providing

  • The inconclusive result of the UK general election and increased speculation of higher Government spending was an additional drag on the sterling bond market

  • The big move in interest rate expectations came in the last week of June. A speech given by ECB President, Mario Draghi, was interpreted to mean the ECB would soon begin tapering the amount of purchases it is making as part of its quantitative easing programme

  • European government bond yields (which move inversely to prices) moved higher in response. The ECB issued subsequent statements suggesting the market had misunderstood Draghi’s message, which was intended to strike a balanced tone

  • Nonetheless, yields continued to rise, and by 30 June the 10-year bund yield had reached 0.47%, an increase of 17 basis points (bps) over the month

  • In the UK, a shift in tone was also apparent. Some parts of the UK market are now pricing in a hike in UK interest rates by March 2018

  • The yield of the 2-year Gilt (which is very sensitive to interest rate expectations) increased 23bps on the month, to end June at 0.36%

  • The move higher in government bond yields led to some weakness in corporate bond markets, however, given the corporate sector is typically a beneficiary of positive economic data, corporate bonds outperformed government bonds over the month

What do we think?

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. There are certainly more geopolitical headwinds to be faced and, economically, the tide is turning or has already turned, with Central Banks indicating that the QE party is either over or nearing the end. Markets do not like surprises and so, although the Fed hiked US interest rates in June, this was well flagged and so the market took it in its stride. However, with the UK and Europe embarking on Brexit talks, if these become difficult, this could be the trigger for institutional profit-taking, following the strong market progress over the last year or so. Summer is also traditionally more volatile and so news, good or bad, can have a disproportionate impact on share prices.

Although we share the consensus view that interest rates in the UK are unlikely to rise this year, they will, of course, have to rise at some point. Therefore, the observation that household savings are at their lowest point since records began in 1963 gives rise to concern about whether mortgage holders will be able to cope with rate rises when they do occur. At the same time, it is being reported that general debt levels, including unsecured debt such as credit cards, personal loans and car finance, are approaching levels last seen before the financial crisis.

This is giving the Bank of England cause for concern and the Governor has issued instructions to High Street banks to keep more money in reserve to protect the financial system. Let’s hope for everyone’s sake that we don’t start heading down that road again…….!!


Date of next meeting: 23rd August 2017

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.

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