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Investment Committee Meeting Minutes - May 2017

  • 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.

Covering the Month of April 2017

UK

  • The UK economy has been resilient following the EU referendum but uncertainty remains following the future relationship with the EU. Sterling remains the primary driver of the attractiveness of UK companies with overseas exposure
  • Sterling rose strongly relative to the US dollar in response to the announcement of a snap general election. This resulted in significant divergence between the internationally weighted FTSE100 which sold off sharply and the Mid Cap 250 index, which hit a record nearing month end
  • Economic data released in April suggested the beginnings of a slow-down in the UK economy. GDP rose 0.3% in the first quarter, underperforming the Monetary Policy Committee’s 0.6% target
  • UK retail sales declined 1.4% in quarter one, the most significant drop in almost six years. Online retailers fared better than their counterparts in physical stores however, with online sales surging 19.5% year-on-year
  • In corporate news, UK utility companies were hit by the news that the Conservative party’s election manifesto will address standard variable tariffs. Centrica was among the biggest fallers following the announcement
  • Whitbread, owners of Premier Inn and Costa Coffee warned of a tougher consumer environment, as full year results missed analyst forecasts. In contrast, online fashion retailer Boohoo.com reported significant growth nearly doubling profits in the year to February

US

  • US equity markets started April on a more volatile note with the S&P 500 index experiencing its biggest one day reversal since February 2016
  • The announcement of President Trump’s tax reform plans was welcomed by investors and coupled with encouraging corporate earnings releases for the first quarter of 2017, the S&P 500 index extended its run of consecutive positive performances, returning 1.03% in April. However, it remained negative in sterling terms returning -2.3%. Nonetheless, the S&P 500 index has delivered a total return of 2.34% for 2017 so far
  • At sector level, strong performance came from consumer discretionary and IT sectors, while telecoms, and financials lagged. Also, concerns surrounding oil oversupply and fluctuating oil prices contributed to the extended weakness in the energy sector
  • In the economic news, data released by the commerce department showed the US real GDP for the first quarter showed signs of slowing down. According to the advanced estimate, the US economy grew at an annual rate of 0.7%, which is below market expectations and its slowest growth since the first quarter of 2014

EUROPE

  • European equity markets rallied following the first round of the French presidential election, sending the FTSE World Europe (ex UK) index to levels not seen since 2015
  • Cyclical areas of the market performed strongly with the industrial sector being the leading outperformer
  • Macro-economic data signalled a strong start to the second quarter. ECB President Mario Draghi showed growing enthusiasm about the state of the economy while cautioning that underlying inflationary pressure remained too soft to contemplate paring back monetary stimulus
  • The ECB kept interest rates unchanged at record lows and maintained QE, a programme it has pledged to keep in place until at least the end of the year
  • However, headline and core inflation rose to 1.9% and 1.2% respectively which will intensify the monetary policy debate and slowly push the ECB towards a decision about ending the stimulus programme

ASIA & EMERGING MARKETS

  • Asian equity markets generally had a positive return with some stronger than expected economic data helping brush off concerns over political issues in Europe and North Korea
  • However, returns from Asian regions were slightly negative for UK investors as sterling rebounded relative to most Asian currencies
    In China, quarter one GDP was slightly better than expected at 6.9% year-on-year compared to 6.8% in the fourth quarter of 2016. While there have been less fears on capital outflows and currency depreciation, this has been offset by concerns over policy tightening
  • Emerging market equity markets edged past their counterparts in the developed world for the fourth consecutive month. Among the emerging market regions, Europe, Middle East and Africa performed the strongest, led by Poland, Greece and Turkey
  • Latin American equity markets struggled to gain ground
  • Aside from gold and natural gas, commodity prices declined
  • From a sector perspective, technology and consumer discretionary performed well, while materials and utilities were the only sectors that ended in negative territory

JAPAN

  • The performance of Japan’s equity market was impacted by currency movements
  • After a disappointing start to the month markets recovered finishing slightly higher in local currency terms
  • Mid-month geopolitical fears eased causing the Yen to give back some of the earlier gains and the equity market to rebound

FIXED INTEREST

  • April was a month of two halves for bond markets. During the first half, uncertainty about the French Presidential election and the recent bond rally, weighed on corporate bond returns and increased demand for government bonds
  • Sentiment shifted in the second half of the month amid reports of relatively strong corporate earnings and a more market friendly outcome to the French Presidential election
  • The Bank of England announced 11 months ahead of schedule that it completed the £10 billion of corporate bond purchases which formed part of its latest QE programme
  • According to data from Merrill Lynch, Gilts returned 0.3% while sterling investment grade corporate bond returned 0.6%

NOTES FROM WEBINAR ON 16/05/2017
RICHARD BUXTON MANAGER OF OLD MUTUAL UK ALPHA FUND

  • Markets are at all-time highs
  • Growth coming through in Europe which Richard expects to continue
  • China tightening policy, raising rates which is prompting slowdown with consumers, but big national debt projects are still coming through
  • With the Macron victory in France and local state elections for Merkel in Germany, markets are becalmed
  • Quarter 1 earnings figures in the UK are pretty good – there is lots of cash around
  • Within the fund Richard has increased the holdings in Rio and Glencore as commodity prices had dropped and share prices had fallen
    He has also added further holdings in Tesco @ £1.78 as he is a huge believer in their recovery story and the deal with Booker
  • Mid and small cap indices have propelled other funds higher and so short term performance is below average vs peer group in the UK All Companies sector. The fund is still above average over 1 year
  • Lots of bad news is priced into some consumer stocks and Richard expects some to do better than expected, eg Pets At Home
  • He expects the oil price to stay in 40-60 USD range

What do we think?

The VIX Index is a measure of what the market expects the short-term volatility of the US Stock Market (the S&P 500) to be. The higher the number the more fearful investors are (hence why it is also known as the Fear Index) and the lower the number the more complacent and relaxed investors are. The chart below shows the VIX Index since the start of the Millennium to the time of writing. We see spikes of fear at the end of the technology bubble of the 1990s, the Twin Towers and the start of the Iraq War in 2003 followed by a period of calm up to 2007. Fear rises as the extent of the Credit Crunch is revealed and spikes extraordinarily in October 2008, followed by a gradual recovery of nerves with a few shocks along the way.

The chart below shows how the S&P 500 and the FTSE 100 have fared over the same period. Shares perform strongly during periods of low volatility and vice versa.
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. Your portfolio remains the best place to hold your money for the medium and long term, but despite record low interest rates, cash remains king when you have earmarked to spend it within the next five years.



Date of next meeting: 15th June 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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