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Investment Committee Meeting Minutes - October 2015

  • By Richard Ellis
  • 30 Oct, 2015

There is mixed news in the global economy and so plenty of different interpretations on the state of play are available from the fund managers and economists with whom we speak. 

We continue to be cautiously optimistic about medium to long term prospects but remain of the opinion that how the US and other indebted Western economies manage their interest rate policy, the impact of the slowdown in China and the overall strength of the global economy over the next couple of years will determine the path of equity and bond markets. Commercial Property continues to look attractive as an asset class and we have recently increased our exposure in our model portfolios.

Fraser Heath Market Update


  • September saw the FTSE All Share index fall by 2.7% as evidence of slower economic growth in China accumulated. Overseas negative macro-economic factors, such as falling commodity and oil prices and the expected timing of what would be the first US interest rate rise since 2006, continued to weigh on sentiment.

  • For the second month running, sentiment remained weakest among commodity and energy related stocks, which were among the biggest fallers in share price terms over the month.

  • For the third month in succession, smaller company share prices proved more resilient, reflecting the index’s limited exposure to oil and gas.

  • UK inflation, as measured by the Consumer Price Index (CPI) remained flat, making an interest rate rise unjustified in the short term.

  • If the latest fall in oil prices is sustained, this will provide a further boost to UK growth and contribute to the headline CPI inflation remaining close to zero for a little longer than envisaged in current consensus forecasts.

  • In sector terms, mining and energy related companies saw significant share price weakness as the earnings outlook for such companies became more uncertain.


  • The prospect of the Fed increasing interest rates, coupled with China’s slowing growth, unsettled the US equity market which saw the S&P 500 index return

  •  -2.5% (in US $ total return terms).

  • Consumer staples and utilities benefitted from their perceived safe haven (ie companies that have traditionally paid higher dividends) and were the only sectors in positive territory.

  • When the Fed opted to leave interest rates on hold, markets became concerned by negative overseas developments and these seemed to overshadow mounting evidence of a resilient US economic recovery.

  • There was an upward revision to the second quarter GDP growth, which showed that US economy expanded at its fastest pace since the third quarter of 2014.

  • US employers announced a record number of job vacancies with the private sector having created 200,000 jobs in September. Wage growth however remains muted.


  • Concerns over global growth continued to weigh on European equity markets with the FTSE World Europe (Ex UK) Index falling by -4.3.% (in Euro total return terms).

  • Despite the uncertainties about the China led emerging market slowdown, macro economic data in Europe continued to show that the region’s economic outlook is improving.

  • On a year-by-year basis industrial production increased by 1.9% continuing the upward trend since the start of 2015.

  • Euro headline inflation fell to -0.1% year-on-year, but core inflation has remained stable at 0.9% over the past 5 months.

  • The ECB has held out the prospects of additional monetary stimulus should consumer prices and employment figures remain subdued.


  • Sentiment in the Asian equity markets suffered due to slow global growth and uncertainty about US interest rate policy.

  • The Chinese equity market declined as China’s economic slowdown was weaker than expected.

  • The utilities and IT sectors were the better performers, whilst the energy and telecommunication sectors lagged the most.

  • Global emerging equity markets experienced another volatile month with losses being recorded in all regions. Latin America was the worst performer, followed by Europe.

  • Brazil lost investment grade status from S&P ratings agency, a move not followed by other agencies. Almost 70% of the market decline in the MSCI Brazil Index was attributed to a sharp depreciation of the currency, which fell by 8.3%.


  • Japanese economic data remains mixed. Domestic consumption remains weak with no growth in retail sales, while prices continued to fall, with core CPI inflation turning negative.

  • There have however been signs of higher wages and gradual improvement in the employment market, as the jobs-to-applicants continued to rise.

  • It is expected that the Japanese economy will see a second consecutive quarter of negative growth when Q3 GDP figures are released, increasing the possibility of further monetary policy easing and fiscal stimulus in support of the economy


  • Whilst Government bond markets benefitted from the Fed’s decision to hold US interest rates at their existing level, so called “risky assets” including corporate bonds and emerging market bonds came under pressure.

  • Ongoing concerns about economic growth in China and the collapse in commodity markets further weighed on returns from corporate bonds.

  • There was also volatility in the corporate bond market as a result of factors specific to individual companies. The exposure of Volkswagen’s fraud added to bond market volatility, with yields on the company’s bonds rising significantly.

  • According to data from Merrill Lynch, gilts returned +.3%, while US Treasuries returned +0.9%.  Sterling investment grade corporate bonds returned -0.1%.


Macro view

  • US economy close to full capacity and unemployment below average.

  • Biggest driver of inflation will be wage growth.

  • Monetary policy acts with a lag, so if interest rates rise now unemployment will continue to fall for 2 years afterwards.

  • Lower oil price also significantly affects global economy and inflation.

Where’s the value in credit?:-

  • Risk assets re-priced this year, especially equities and high yield bonds.

  • Spreads look attractive now compared to the long term average.

  • US and European high yield also look attractive.

  • Default rates in the US very low but the expectation is that these might tick up in 2016, but this is probably discounted at present.

Fund Positioning

  • Positioned to take advantage of current conditions. Fund is usually invested 1/3rd   investment grade bonds, 1/3rd   high yield bonds and 1/3rd   Government bonds.

  • Currently 50% in investment grade, lower than 30% in high yield and around 15% in government bonds.

  • Index-linked bonds starting to look attractive in the medium term.


Macro view

  • We are all continuing to feel the effects of the fallout from China with the emerging markets slowdown and commodity weakness impacting global industrials.

  • However western economic data solid, unspectacular but not collapsing.

  • Richard has taken advantage of market correction to continue to build positions in companies he likes.

  • Market is not expecting any interest rate rises anytime soon.

  • Investor sentiment so bruised that incremental good news will create rallies.

  • Investors currently comfortable with defensives and don’t feel the need to take extra risks, but as a result are running the winners to higher and higher levels.

Fund positioning

  • Good cash inflows.

  • During the correction over the last three months added to mega caps; Astra Zeneca, GSK, Vodafone, Shell & BP.

  • Bought Worldpay at IPO – lots of research on the business was carried out prior to purchase and Richard got 60% of what he wanted at issue.

  • He is still happy to hold Tesco – he views this as a 5 year journey, which will be a bumpy ride but the business is being restructured and is delivering as expected at the moment.


There is mixed news in the global economy and so plenty of different interpretations on the state of play are available from the fund managers and economists with whom we speak. We continue to be cautiously optimistic about medium to long term prospects but remain of the opinion that how the US and other indebted Western economies manage their interest rate policy, the impact of the slowdown in China and the overall strength of the global economy over the next couple of years will determine the path of equity and bond markets. Commercial Property continues to look attractive as an asset class and we have recently increased our exposure in our model portfolios.

Date of next meeting 19th   November 2015

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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