Fraser Heath Logo | Independent Financial Advisors Bristol


Investment Committee Meeting Minutes - October 2017

  • 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.

Covering the Month of September 2017

UK  

  • The UK equity market closed September broadly flat, punctuated by volatility as continued geopolitical uncertainty around the US and North Korea weighed on global market sentiment.

  • Sterling strengthened materially against the euro and US dollar, particularly after rhetoric from the Bank of England made clear its intention to ‘ease its foot off the accelerator’ with an expected interest rate rise in November.

  • While increasingly hawkish in his tone on interest rates, Mark Carney, Bank of England governor, warned that a “pocket of risk” is emerging in consumer borrowing, where “responsible lending” was in danger of becoming “reckless lending” through credit cards and car loans.

  • Economic data continued to provide mixed signals around UK economic growth; the Office for National Statistics (ONS) revised down growth figures for the second quarter of the year. Slower growth in the last three quarters of 2016 brought year-on-year GDP growth in the second quarter down from 1.7% to 1.5%.

  • Aggregate UK house prices across the country rose during the third quarter, showing year-on-year growth of 2.2%, but London house prices declined 0.6% over the quarter.

  • The Purchasing Managers Index, tracking sentiment in the services sector, indicated a slowdown of growth in the sector during August, most evident in consumer-facing services including cinemas, hotels and restaurants. 

US  

  • The US equity market ended September in positive territory – its sixth straight monthly rise and longest winning streak since May 2013. The market gains were propelled by the Republicans, unveiling a sweeping tax reform proposal aimed at lowering the corporate tax rate from 35% to 20%.

  • If Congress passes such a cut, investors are hopeful that it would feed through to companies’ bottom lines. However, the US President’s unpredictability, coupled with his fraught relationship with Congress, tempered expectations. Given how tax reform hopes were dashed earlier in the year, it is widely acknowledged that any legislation would be tricky to pass.

  • Hopes remain, though, that US tax reform will aid economic growth. Indeed, the US Federal Reserve gave a broadly optimistic take on the economic outlook for the US when Fed chair, Janet Yellen, warned that they should be wary of raising interest rates too gradually. The Fed said that it would stick with plans for further interest rate rises – another this year, probably in December, as well as three further increases in 2018.

  • September saw a resurgence in the energy sector, helped by a sharp rise in the oil price.

  • Brent Crude, the international benchmark, has continued to rise since hitting its low for the year-to-date on 21 June.

  • As an interest-rate sensitive sector, financials rallied on expectations around the Fed’s forecast for another interest-rate rise this year. Conversely the utilities sector was the weakest performer in September for the same reason. 

EUROPE  

  • European equity markets rose in local currency terms but retreated in sterling terms. The pound jumped versus the euro in September after the Bank of England hinted to a possible rise in interest rates.

  • On the European domestic front, economic data continued to surprise, beating expectations. In Germany, Angela Merkel won a fourth term as German Chancellor in a victory that reflected fading support for the two main parties and a surge of the far-right AfD.

  • From a sector perspective, the basic materials sector was the strongest performer, as commodity prices continued their rally helped by Chinese demand. This was followed by the industrials sector, which benefited from good global growth indicators.

  • The utilities sector led detractors this month followed by the telecommunications sector, amid a rise in government bond yields.

  • On a stock level, Greek lenders were among the biggest detractors on news that the European Central Bank (ECB) may decide to conduct stress tests on Greek banks in 2018 earlier than originally planned to address International Monetary Fund concerns.

  • On the macroeconomic front, the European economy continued to surprise on the upside. While many predicated moderation or even a deceleration in activity levels, eurozone private sector activity surveys, known as Purchasing Managers Indices (PMIs), signalled a renewed impetus to already-impressive rates of growth in output, order books and employment during September.

  • The PMI gauge for the European manufacturing sector strengthened to the greatest extent in over six-and-a-half years this month. Particularity impressive was the level of job creation, which rose to the greatest extent since the eurozone survey series began in June 1997.  

ASIA & EMERGING MARKETS  

  • Asian equity markets were mixed over the month following strong gains so far this year. This was against a backdrop of geopolitical tensions pertaining to North Korea’s weapon tests and US dollar strength due to the Federal Reserve’s hawkish stance on interest rates and its announcement of a balance sheet reduction in the near term.

  • China’s equity market ended the month higher, despite a sell-off towards the end of the month on the back of a ratings downgrade from S&P due to high debt and property measures aimed at curbing rising house prices.

  • Elsewhere, South Korea was one of the region’s better performing markets led by the technology sector.

  • Conversely, Taiwan’s market came under pressure from the adverse impacts on Apple’s supply chain of production delays for iPhones and weak demand for the iPhone 8.

  • In India, the equity market suffered outflows amid rising crude oil prices, concerns about its widening fiscal deficit and a moderating in interest rate cut expectations given the recent spike in inflation.

  • For the first month this year emerging equity markets underperformed their peers in the developed world, although on a year-to-date basis they still remain comfortably ahead.

  • The main drag on performance during September came from the EMEA (Europe, Middle East and Africa) region, with weakness most pronounced in Greece and Turkey. 

  • By comparison, Russia was a rare bright spot in the region, drawing comfort from stronger oil prices.

  • Latin American equity markets finished in positive territory, with Brazil leading from the front, although confidence towards Mexico was dented following two devastating earthquakes.

  • Materials and telecoms were the worst performing emerging market sectors, while healthcare outperformed.  

JAPAN  

  • Japan’s equity market came under pressure early in the month on renewed geopolitical risk on the Korean peninsula, which along with a decline in US Treasury yields resulted in yen appreciation.

  • Investor risk-appetite picked up again as US yields climbed and the yen weakened. Markets climbed further after Prime Minister Shinzo Abe called a snap general election for 22 October.

  • In terms of economic data, statistics showed weaker-than-expected capital expenditure by large manufacturers in the second quarter, although manufacturing surveys remained positive. 

FIXED INTEREST  

  • Investment grade corporate bond markets were lower over the month, as rising government bond yields impacted on returns. High yield bond markets were the notable exception, with both US and European high yield bond markets delivering positive returns.

  • The sell-off in government bond markets was led by the Gilt market. The latest minutes from the Bank of England’s Monetary Policy Committee stated that, unless there is a significant downturn in economic data, some withdrawal of monetary stimulus is likely to be appropriate over the coming months. Financial markets have interpreted this and subsequent statements to mean that the Bank of England will increase interest rates by 0.25% at its November meeting.

  • In the US, the Federal Reserve announced it would begin reducing the trillions of dollars’ worth of bonds it amassed as part of its programme of economic stimulus following the Global Financial Crisis in 2008. From October 2017, the Fed will stop replacing a small portion of the bonds that mature each month.

  • Initially this will result in a reduction of the Fed’s balance sheet by US$10bn a month rising to US$50bn a month in two years. The announcement marks a significant change in policy, but it had been well telegraphed to the market and so had only a minimal impact on bond prices.

  • The sterling corporate bond market was lower on the month but it outperformed the Gilt market, with the premium over government bonds that UK companies need to pay to borrow falling on the month. There was a similar pattern of returns in the eurozone, but given the smaller move in core government bond yields, the fall in corporate bond market returns was less.   

  • One of the key focuses for markets in the coming months is likely to be reduction in economic stimulus provided by the European Central Bank. During his September news conference, ECB president Mario Draghi announced that the central bank was looking at how to reduce the amount of economic stimulus it is currently providing with an announcement expected in October.

     

      What do we think?

    As our above minutes reflect, 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.

     

    Since then we have seen inflation creeping up to 3%, well above the Bank of England’s 2% target, and unemployment continue to fall. Such conditions would ordinarily suggest an imminent rate rise and, unsurprisingly, the pound has strengthened on the back of these comments.

     

    So, what does this mean for investors? Well, the equity market has taken this news in its stride, with the UK indices still close to their respective all-time highs. It remains to be seen whether political issues around Brexit negotiations start to have an impact at some point, especially if a “No Deal” outcome looks likely. For bond markets, which have had an extraordinary run now for so long, rising interest rates typically mean falling prices, as the fixed rate coupon being received by the investor looks less attractive when the underlying base rate is increasing. Investors are receiving less reward for the risk they are taking. However, we remain confident that the fund managers we choose for our portfolios are capable of picking their way through the equity and bond markets and, of course, we will continue to monitor performance and make changes to our model portfolios should they be required.

      

    Date of next meeting: 14th November 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.  

More Posts
Share by: