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Investment Committee Meeting Minutes - March 2017

  • 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.

UK

  • The UK equity markets performed strongly continuing the bullish trend that characterised the start of the year.
  • The Bank of England (BoE) stood firm on UK rates but revised GDP growth expectations for 2017
  • Headline UK inflation neared the government’s 2% target due to rising food and fuel prices, which seemed to have a knock-on effect on consumer spending
  • Corporate news flow during the month was dominated by UK major banks, which delivered a mixed set of results for the full year. Lloyds Banking Group reported a £2.2bn dividend pay-out on the back of its best results since the financial crisis. Lower provisions for mis-selling PPI helped the bank more than double its annual pre-tax profits from the prior year. Barclays annual profits tripled year-on-year, boosted by strong performance from its UK and international units, alongside a fall in litigation charges. Mis-selling and conduct charges were the main drivers behind £7bn annual loss for RBS; chief executive, Ross McEwan, unveiled a new £2bn cost-cutting plan in a bid to return to profit in 2018. HSBC saw its share price pull back after an eight month rally, as the company announced lower-than-expected profits on the back of write downs
  • BP blamed poor results in both upstream and downstream operations for weaker-than expected results in the fourth quarter of 2016, but the higher oil price towards the end of the year helped profits, returning the company to profitability over the full year.
  • British American Tobacco reported a strong set of results for the full year, announcing major expansion plans for its next generation e-cigarettes and vaping products; weakened sterling and price increases offset flat volumes, and the tobacco giant pleased the market with a better-than-expected 10% dividend increase.

US

  • Mixed economic data released through February did little to impede the continued rise of US equities. Optimism over President Donald Trump’s reflationary ambitions remained firm despite some surprising mishaps in the formation of his cabinet, while the economic data did little to jeopardise the ongoing trend of rising inflation or the hawkishness of the Fed.
  • The S&P 500 index reached an historic high of 20 trillion US dollars in market capitalisation for the first time in mid-February, achieving an all-time high of 2371.54. That said, the market’s rise obscured an element of nervousness among investors, as evidenced by strength in more defensive sectors, such as consumer staples and utilities, and relative weakness in cyclical areas (those more sensitive to economic cycles) like energy, consumer discretionary and industrials
  • Sector performance was mixed, with some so-called ‘defensive’ areas performing well alongside more economically sensitive sectors. Healthcare, financials and consumer staples led the market higher in February, while telecommunications and energy were the key underperformers
  • In economic news, a second reading by the US Commerce Department for economic activity in the final three months of 2016 revealed lower-than-expected US GDP growth of 1.9%. The softer data was primarily attributed to downward revisions to business and government investments, which offset robust consumer spending – a key contributor to US economic growth.
  • Although private sector output growth moderated from the 14-month high recorded at the start of 2017, it still supports a solid pace of economic growth overall.
  • Core Consumer Price Index (CPI) (which strips out food and energy costs) rose 0.3% in January and 2.3% year-on-year, providing support for the Fed’s goal of three interest rate hikes in 2017.

EUROPE

  • European equity markets rose in February. Economic data showed a strong activity momentum, and European corporate earnings estimates continued to rise upwards.
  • On a sector level, the rotation away from defensive industries and into cyclicals (those more sensitive to economic cycles) witnessed over the last few months stalled in February, mimicking the drop in government bond yields
  • The healthcare and utilities sectors were among the leading performers this month, along with the technology sector. Meanwhile, the financials sector lagged following a strong rally since the start of the fourth quarter in 2016. The consumer services sector also trailed the overall market.
  • On the macroeconomic front, data confirmed the resilient and broadening base of the European economic recovery, underpinned by an accommodative monetary policy, less austerity, a favourable exchange rate and some structural reforms.
  • 2017 earnings projections have been steadily revised up, in a welcome departure from the trends observed over the last few years, where initial estimates were unwound as the year progressed.

ASIA & EMERGING MARKETS

  • Most Asian equity markets recorded decent gains in February, largely due to better than-expected economic data. Asian currencies were broadly stable against the US dollar, with the Korean won and Taiwan dollar being the region’s best performing currencies for the second straight month, in part due to easing fears that US trade policy will take a strongly protectionist turn under President Trump.
  • China’s equity market made good gains, reflecting robust economic data, positive earnings revisions and fewer concerns surrounding capital outflows. Meanwhile, financial regulators drafted a consultation paper aimed at reducing financial leverage and risk in asset management products, while the People’s Bank of China continued to tighten monetary conditions by pushing market interest rates higher.
  • India was one of the region’s best performing equity markets despite the central bank signalling an end to the monetary policy easing cycle.
  • Latin America and emerging Asia vied with each other for the best performing region, with EMEA (Europe, Middle East and Africa) being the laggard. Brazil and Mexico led the equity gains in Latin America, whereas performance in EMEA was more diverse, with Russia losing ground and Egypt posting double-digit returns.
  • All emerging market sectors, apart from energy, ended the month in positive territory

JAPAN

  • The Japanese equity market ended the month higher in local currency terms. Although earlier this year there had been significant worries about criticism by the Trump administration toward Japanese trade and currency policies, the US-Japan leaders’ summit in February saw no in-depth discussion of exchange rates or economic policy, and investors were reassured for now.
  • At home, Japanese economic conditions have been steady, with fourth quarter real GDP growth of 1% (quarter-on-quarter) driven primarily by strong net exports. Regarding domestic demand, consumer confidence continued to improve, with the consumer confidence index attaining its highest level since September 2013. High labour participation rates led to gains in employment income, which boosted confidence.
  • Meanwhile, investor sentiment was well supported by a solid third quarter corporate results season. Results were well above consensus thanks to the robust global macroeconomic environment, and companies have tended to increase their full-year earnings guidance. In particular, positive surprises far outweighed negative ones among the global cyclicals sectors, such as autos, trading and chemicals.

FIXED INTEREST

  • During February, bond markets rallied as investors re-evaluated some of their previous assumptions about Donald Trump’s reflation policies and political risk in the Eurozone.
  • US 10-year Treasury yields were slightly lower on the month with the 10-year yield ending February at 3%, down from 3.1% at 31 January 2017.
  • The big move in yields, however, has been in Europe, where political risk dominated. The yield of French government bonds followed the perceived chances of electoral success for far-right Presidential candidate Marine Le Pen. An opinion poll released mid-month that showed her narrowing the gap with centrist opponents saw French government yields spike higher
  • Meanwhile, the yield on 2-year German government bonds (Schatz) reached a historic low of -0.95%. As they did so, the premium the market demands for holding French over equivalent German government bonds reached its highest level since 2012. However, toward the end of the month, French government bonds recovered, as some polls showed Marine Le Pen’s campaign to be losing ground.
  • Despite the risk-off tone within government bond markets, corporate bonds also performed reasonably well. Their higher sensitivity to interest rates helped European investment grade corporate bonds to outperform high yield bonds.
  • In aggregate, bonds within the financial sector underperformed relative to those issued by non-financial companies.

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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