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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 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 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.


  • 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.


  • 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


  • 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.


  • 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.


  • 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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