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Investment Committee Meeting Minutes - November 2017

  • 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.

Covering the Month of October 2017

UK  

  • The UK equity market rose in October, against a backdrop of rising oil prices and continued monetary tightening. Brent crude oil broke through the elusive US$60 mark into month-end, prompting significant outperformance from the major oil companies.

  • On the macroeconomic front, the market continued to price in expectations of a modest rise to UK interest rates at the November Monetary Policy Committee meeting.

  • Economic data indicated modest growth in the UK economy; GDP rose faster than expected in the third quarter, increasing 0.4% between July and September. The service sector, which makes up around three-quarters of the economy, grew by 0.4%, while manufacturing rose by 1%; construction contracted for the second consecutive quarter.

  • On the corporate news front, third quarter results from the large banks captured the headlines with mixed progress reports. Barclays confirmed declines in bond and currency trading revenues; weaker performance by the bank’s investment banking arm was offset by an uptick in its UK consumer business. Lloyds more than doubled profits in the third quarter, also boosted by the absence of PPI provisions. RBS moved into profit, but still faces a multi-billion US dollar fine from the US Department of Justice for mis-selling mortgage-backed securities ahead of the financial crisis.

  • At its capital markets day, British American Tobacco (BAT) said it expects next generation products to generate revenues of £500m this year, rising to £1bn in 2018 (breaking even) and £5bn by 2022.

  • BP reported strong results for the third quarter of the year, more than doubling profits year-on-year as a result of improved earnings in its fuels, petrochemicals and refining businesses flowing through from rising oil prices.  

US  

  • The US equity market ended October within touching distance of record highs boosted by strong earnings statements and upbeat economic growth. US companies have also been highlighting the prospect of possible tax reform as another reason for optimism.

  • Analysts’ expectations for US corporate profits had been muted by the recent hurricanes, effectively lowering the hurdle for companies to surmount. However, the steady stream of positive company earnings reports helped drive the ‘risk-on’ mood which gripped markets towards the end of the month.

  • More cyclical sectors, such as financials, materials and industrials, outperformed more defensive areas, though technology was once again the leading sector over the month.

  • Microsoft, Intel and Alphabet – the owner of Google – all reported stronger than expected earnings, helping the technology sector reach an all-time high of its own. Amazon is technically a consumer discretionary stock, but it has benefitted from the same phenomenon as its tech peers as consumers shift more of their purchases online. Amazon’s cloud computing business has also grown rapidly. 

  • An overall solid earnings season confirmed that the economy had continued to improve. Confidence in the outlook for the US economy was boosted when third quarter growth came in higher than expected. GDP rose at an annual rate of 3%, suggesting that hurricanes Harvey and Irma had little impact on the economy overall.  Analysts had expected growth of 2.5%. The rise marks the strongest consecutive quarters of GDP growth in three years.

  • The strong showing made a December rise in interest rates even more likely. It could also help Republicans push through ambitious tax plans, with the White House claiming that strong growth would pay for US$1.5 trillion of planned cuts to corporate and personal taxes. Further positive economic data showed that the number of Americans filing for first-time jobless benefits fell to the lowest level since 1973. The 4.2% unemployment rate is the lowest level since 2001. 

EUROPE  

  • On a sector level, technology was the strongest performer in the region, followed by utilities. Meanwhile, the healthcare sector was the leading detractor

  • On the macroeconomic front, growth in the eurozone remained very healthy. The region posted its eighteen consecutive GDP quarterly expansion. On a year-on-year basis, GDP growth hit 2.5% – the best since early 2011.

  • This expansion continued to be largely fuelled by domestic factors (household consumption and investment) and underpinned by strong job creation. The euro-area unemployment rate declined to 8.9% in September, falling to the lowest level since January 2009 and beating economists’ estimates. Despite the bloc’s strengthening economy, a sustained pick-up in prices remained subdued. Eurozone headline inflation retreated to 1.4% in October (from 1.5% a month earlier), while core inflation (excluding food and energy) dropped to 0.9% from 1.1%.

  • On the monetary policy front, after years of ultra-loose policies, the European Central Bank took the first steps towards exiting its Quantitative Easing programme, given the solid economic activity indicators in the region.  

ASIA & EMERGING MARKETS 

  • Asian equity markets rebounded strongly in October, with new record highs for a number of markets. The IT sector resumed market leadership with support from the energy sector, while telecoms and real estate lagged.

  • South Korea was the region’s best performing market, supported by news that an agreement with China had been reached to normalise relations following the recent fallout over the installation of THAAD (the US anti-missile system).

  • Of the ASEAN markets, Thailand, Indonesia and the Philippines reached record highs. Meanwhile Malaysia was the biggest laggard and the region’s only market to end the month lower, in local currency terms.

  • It was a positive month for global emerging equity markets as they extended their year to- date gains over their peers in the developed world. Underpinned by an improving earnings outlook, emerging Asia led the advance with Korea, India and Taiwan topping the leader board. 

  • Outside of Asia, equity performance varied, with gains in Chile and Hungary being offset by losses in Colombia, Mexico and Russia. Technology was the best performing sector in Emerging Markets, followed by health care.

  • Latin America was the only emerging market region to register a loss during October. Colombia was the weakest performing country, followed by Mexico and Brazil. By contrast, equity markets in Chile and Peru were up, drawing comfort from higher metals prices.

  • Mexico’s economy contracted for the first time in four years in the third quarter as a hurricane resulted in lower oil production and two earthquakes stalled growth in the services sector. 

JAPAN 

  • Japan’s equity market ended the month with solid gains in local currency terms, with the market benefiting from the large victory of the ruling coalition in the snap election on 22nd October.

  • This win gave President Abe and his ruling Liberal Democratic Party a fresh mandate for economic stimulus and Abe’s economic policies, including monetary policies which have been supportive to the economy. Furthermore, share prices have been supported by the quarterly corporate results season which has provided more positive surprises than negative. 

FIXED INTEREST  

  • October was a positive month for bond markets with corporate bonds in general outperforming government bonds.

  • In terms of credit quality, high yield corporate bonds outperformed investment grade bonds.

  • At a sector level, there was some dispersion of returns by region. In the UK, financials were the best performing sector, while in Europe and the US, financials were the weakest part of the investment grade market.

  • The US Federal Reserve began to reduce the amount of stimulus it is providing markets by not replacing a small portion of the bonds that mature in its portfolio. The Fed will reduce its stock of bonds by US$10bn a month rising to US$50bn a month in two years. There was minimal market impact from the start of the process, which had been widely communicated to the market.

  • Meanwhile, the European Central Bank announced that it would be tapering its asset purchases. From January 2018 the monthly purchases will reduce from the current €60bn to €30bn. However, the programme will be extended out until September 2018, so the ECB will still be buying a large amount of bonds. This was more accommodative than parts of the bond market were expecting and so bonds rallied following the announcement.

     

    What do we think?

    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.

     

    One of the reasons why investments make more money than cash over the medium to long term is that investors accept what is called the “risk premium”. It is the compensation that you get for taking the extra risk compared to taking none. It should follow then that by investing in more speculative investments you accept more risk, but we have not really seen big falls for some time. There is an inevitability that at some point risk and volatility will return. We must accept that we don’t know when these periods will arrive and also that provided that we are investing money for the medium to long term that we must try not to get too dispirited when they arrive.

     

    As a read of these minutes will show, the strength of the global economy at this time is looking good and long may it continue. But we should also remember that it is the expected strength of the global economy in the future rather than today that really drives short term valuations. While we may all have opinions as to the direction of travel for the economy, no one can know for sure. As Banquo says to the witches in Macbeth, “If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me.”

     

    Date of next meeting: 13th December 2017

Fraser Heath News

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.

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.  

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