Fraser Heath Market Update
The turbulent start to 2016 moderated somewhat in March. UK equity markets delivered a modestly positive return, with the FTSE 100 index outperforming the FTSE All Share index as large cap companies continued their recent better performance against their smaller peers.
The UK budget had minimal impact on the stock market, which instead seemed to take direction from other central banks and from some recovery in depressed oil and mineral prices.
Barclays became the latest FTSE100 company to announce a reduction in its dividend pay-out. It was not all bad news for shareholders in the financial sector, as Legal & General and Aviva confirmed dividend increases on the back of good trading and cash generation.
March saw further gloom from the UK high street however, as Next warned it expected 2016 to be the most challenging year experienced since 2008.
The US equity market reclaimed the steep declines incurred earlier this year, as the S&P 500 index returned 6.8% for the month of March (in US $ total return terms)
The combination of fresh gains for oil prices and the Fed indicating that it would raise interest rates only twice in 2016 helped to boost sentiment,
All sectors were in positive territory over the month. Some of the strongest returns came from defensive sectors which are traditionally strong dividend payers, such as utilities.
The Fed gave a broadly positive assessment of the US economy’s performance noting that inflation had picked up, the labour market was strengthening and that the economy had continued to expand moderately, despite risk from overseas.
The US economy grew faster than previously thought in the final months of last year and growth for the fourth quarter of 2015 was revised upwards to 1.4%.
European equity markets posted the first monthly gain of 2016. The FTSE World Europe (ex UK) Index rose by 2.3% for the month, the highest increase since October 2015.
The basic materials sector was the best performer amid a rebound in commodity prices. The healthcare sector was the biggest detractor and the only sector in the FTSE World Europe Index which reported negative returns.
On the macroeconomic front, some indicators continued to show good signs of progress. The latest Eurozone economic figures revealed that industrial production growth is rising by 2.8% year-on-year, the highest level since 2011. Also construction output growth jumped to 6% year-on-year.
The ECB exceeded expectations with its latest monetary stimulus package announcement. All three interest rates set by the ECB were cut. Asset purchases under the QE programme were increased from €60 bn to €80 bn per month, starting April 2016, and the scope of the programme was expanded to include investment grade corporate bonds not issued by banks. The ECB also announced a new series of long-term loans to banks, to encourage further lending to the real economy.
ASIA & EMERGING MARKETS
Asian equity market performance for March was positive as investor sentiment improved due to a combination of the Fed’s stance on interest rate increases, the ECB interest rate cuts and higher commodity prices.
Although all Asian equity markets made positive gains, performance was diverse. China, Hong Kong and India were the strongest performers while Indonesia and Malaysia made only marginal gains.
Emerging market equities rebounded strongly with their highest monthly gain since 2011. The rally was most pronounced in Latin America where for the third month in a row equity markets outperformed both developed and broader emerging equity markets.
With expectations that the next hike in US interest rates could be delayed, the US dollar fell in value against all emerging market currencies.
Equity markets in emerging Europe also rallied strongly with Greece, Hungary and Czech Republic leading the gains. Sentiment towards the region was boosted by the ECB’s decision to expand its QE programme.
The Japanese equity market ended the month higher as global macroeconomic concerns faded, showing some signs of stability after a rocky start.
However Janet Yellen’s comments regarding the Fed’s intended cautious approach to US interest rate rises saw the Yen appreciate against the US dollar and the equity market fell.
Concerns remain over consumer sentiment as retail sales fell 2.3% from the previous month, although the Japanese job market held steady, with jobs-to-applicant ratio remaining at 1.28, its highest level in 24 years.
Perceived “risky assets” rebounded strongly through the month from February lows.
The increased willingness to take on risk saw the price of “safe haven” core government bonds initially fall, though a scaling back of interest rate expectations saw these losses reversed by the end of the month.
In line with the increased appetite for risk, corporate bond issuance soared during March.
Barclays estimate €77.6 bn of euro investment grade issuance, the second busiest March Barclays has on record.
According to data from Merrill Lynch, sterling investment grade corporate bonds returned+3.1% compared to -0.1% for gilts.
What do we think………?
Markets had a more encouraging month in March, following a fairly disastrous start to the year. As we look ahead at what is to come in the coming months, politics is likely to continue to dominate the news headlines, with the in/out vote in the UK in June followed by the Republican and Democrat candidate selection for the upcoming US election and then the election itself. This all suggests that markets could become quite jittery again in the coming months, especially if the contests are close. If the UK population vote to leave the European Union, we could see a prolonged period of uncertainty and so markets could take such a result quite badly in the short term.
From an economic viewpoint, our expectations are that growth in the UK will continue, albeit modestly, and inflation will tick up, perhaps leading to further speculation about the timing of the next interest rate rise. The Chairman of the Bank of England’s Monetary Policy Committee, Mr Carney, is on record as saying his expectation is the rates will not need to rise until well into 2017, but he reserves the right to change his mind should the economic backdrop necessitate earlier intervention.
Date of next meeting: 25th May 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.