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Investment Committee Meeting Minutes - September 2016

  • By Richard Ellis
  • 07 Oct, 2016

At times like this it can be tempting to think that investments are the only game in town. Nearly eight years have passed since the financial crisis shook markets in October 2008 and as time can be a great healer, some people may be tempted to invest for short term gain. 

  It’s worth keeping in mind that the best time to invest is actually when every bone in your body tells you it’s mad to do so, and that often when everything feels safe and cosy after a rise in values it’s the wrong time.


  • The market upheavals of June and July moderated in August, but investors continued to look for indications of the Brexit impact.
  • Economic data provided a mixed picture of the outlook for the UK economy; data released during the month showed UK mortgage lending contracted sharply in July, while consumer spending rose 0.9% in the second quarter of 2016 ahead of the European Union (EU) referendum.
  • CPI rose to 0.6% in July, pushed up by rising fuel prices through the month.
  • With the second quarter’s earnings season coming to an end, results showed many companies beat analysts’ expectations, with some more economically sensitive sectors such as industrials, consumer discretionary and materials displaying the strongest beats. Earnings growth remained negative in the second quarter of 2016, largely dragged by energy, but displayed notable improvement compared to the first quarter of the year.
  • Pharmaceutical megalith Pfizer continued 2016’s frothy mergers and acquisitions drive, with its purchase of AstraZeneca’s antibiotics business in a bid to add to its pipeline of treatments intended to fight infections. Pfizer will pay US$550m to AstraZeneca when the transaction closes.


  • The S&P 500 stayed mostly flat for the month despite temporarily reaching record highs. The index returned 0.14% in August and is up 7.82% year to date.
  • Market expectations about business and employment conditions as well as personal income prospects continued to improve in August, suggesting the possibility of continued moderate US economic growth in the coming months.
  • Although the S&P 500 hadn’t moved much by the end of the month, the internal dynamics were more telling. Investors witnessed a rotation back into out-of-favour areas of the market that tend to do well when the economy is stronger.
  • At the sector level, some of the strongest returns in August came from cyclical sectors, with financials leading the advance with a 3.6% return. Sentiment towards the sector improved significantly on rising expectations of an interest rate increase by the end of the year, which would ease a significant headwind to US Bank earnings.
  • The information technology and energy sectors also performed well.
  • However, whilst the more economically sensitive industrials sector ended August in positive territory, the materials sector slightly underperformed. In contrast, the perceived ‘safer’ bond-like utilities, telecommunications and healthcare sectors underperformed, as did consumer staples, this was primarily due to rising market expectations about a US interest rate hike near term. The ‘bond proxy’ characteristics of these sectors have been popular with investors this year in the face of historically low government bond yields. Rising interest rates jeopardise this thesis.


  • European equity markets ended up in positive territory for a second consecutive month. The FTSE World Europe ex-UK index advanced in August maintaining the upward trend following the short-lived correction inflicted in late June.
  • On a sector level, financials were the leading outperformers. After getting off to a bad start in 2016, the financials sector posted its best monthly return this year in August. This was supported by better than expected bank earnings results and the increased probability of a US (Fed) interest rate rise before the end of the year.
  • On the macroeconomic front, data in Continental Europe remained resilient, with no signs so far of the recovery being derailed by ‘Brexit’ uncertainty.
  • However, inflation remained subdued; Eurozone headline inflation stayed constant at 0.2% in August, while core inflation had ticked down to 0.8% from 0.9% a month earlier.
  • With the second quarter’s earnings season coming to an end, results showed that the majority of companies have beaten analysts’ expectations, with some more economically sensitive sectors such as industrials, consumer discretionary and materials displaying the strongest beats. Earnings growth remained negative in the second quarter of 2016, largely dragged by energy, but displaying notable improvement compared to the first quarter


  • Many Asian equity markets made solid gains in August as the Fed’s comment on the increased likelihood of a US interest rate hike had limited impact on global risk appetite.
  • However, there was a wide dispersion in performance between markets, with China’s equity market the notable outperformer, while the Philippines equity market was among the weakest.
  • China’s equity market rose on better-than-expected corporates results for the first half of 2016. However, concerns continued about private investment growth, which eased further. This highlights the challenges that remain, which could limit the magnitude of an economic recovery.
  • Elsewhere, Thailand’s equity market was one of the better performers, as it rallied due to the positive referendum poll, which lifted confidence in Thai politics. Furthermore, GDP for the second quarter of 2016 was stronger-than-expected, due to strong domestic consumption which was aided by tourism and fiscal policy support.
  • Global emerging equity markets extended their winning ways for the year by gaining further ground during August. Emerging Asia led the regional gains, primarily driven by China, which drew support from some encouraging macroeconomic data.
  • Performance in Latin America was more mixed, with the peace accord in Colombia triggering a sharp rally in the local equity market, although weaker copper prices had a dampening impact on sentiment towards Chile.
  • EMEA (Europe, Middle East and Africa) was the worst performing region, mainly due to weakness in Czech Republic and South Africa. Political woes in the latter had an adverse impact on the rand which lost 5.8% of its value versus the US dollar.
  • There was more stability in other emerging market currencies, particularly for oil exporters who derived benefit from higher oil prices.


  • The Japanese equity market ended the month marginally higher in local currency terms. Although Prime Minister Abe’s 28th Yen fiscal stimulus package fell short of what is expected to be needed to jump start the economy, investor sentiment was supported by expectations that further easing could be implemented by the Bank of Japan if it is considered necessary.
  • The potential for US interest rates to rise in the coming months and further easing to be implemented has led to a more balanced outlook for the Yen. This has resulted in some currency sensitive sectors outperforming at the expense of the defensive areas of the market.
  • Finally, given the current low interest rates, corporates are continuing to complete share buybacks, providing support to the equity market.


  • Sterling bond markets were the stand-out performers amongst global bond markets this month. Helping to fuel returns for this sector was the Bank of England’s announcement of a series of quantitative easing measures.
  • The Bank of England eased UK monetary policy, as it sought to provide additional support to the UK economy. Amongst the measures announced was a cut in UK bank rate to 0.25%, and a scheme to purchase £10bn of corporate bonds along with £60bn of UK government bonds.
  • Overall, the package of measures announced was well received by bond markets, which rallied strongly in response. The announcement that the Bank of England would purchase corporate bonds had a marked effect on the sterling corporate bond market.
  • Bond yields in the sector fell immediately following the announcement, and corporate treasurers sought to take advantage of the increase in demand.
  • Vodafone was one of the first companies to capitalise, raising £1bn through a 40-year bond offering a 3% coupon.
  • According to data from Barclays, £8.6bn of sterling denominated investment grade bonds were issued in August, making it the busiest month so far in 2016 and the busiest month overall since 2009.
  • By 31 August 2016, the futures market was pricing in a 60% probability of a hike in US interest rates in December 2016. The probability was 36% on 31 July 2016.
  • According to data from Merrill Lynch, sterling investment grade corporate bonds returned 3.4%, while Gilts returned 2.8%. Euro investment grade corporate bonds by comparison returned 0.3%, and Bunds returned -0.5%. Sterling bank bonds returned 1.8%, with Euro Bank bonds returning 0.5%.

What do we think?

Investment portfolios are staying resilient, in part because the pound is staying weak. This position was reinforced by Theresa May’s firm stance on controlling borders leading some investors to think that this may be at the expense of trade deals on Brexit negotiations. A weak pound is good news for the value of assets held in portfolios in overseas currencies, and for global companies listed on the UK stock market whose income mainly derives from countries with other currencies.

Cash deposit rates continue to worsen, with the market leading Santander 123 current account announcing a halving of its interest rate for savers. Savers looking for a better return on their savings may be supporting investment markets too.

At times like this it can be tempting to think that investments are the only game in town. Nearly eight years have passed since the financial crisis shook markets in October 2008 and as time can be a great healer, some people may be tempted to invest for short term gain. It’s worth keeping in mind that the best time to invest is actually when every bone in your body tells you it’s mad to do so, and that often when everything feels safe and cosy after a rise in values it’s the wrong time. Providing you have time for markets to recover and you’re invested with an investment risk strategy that you feel comfortable with, your investment portfolio remains the best way to save for the medium to long term.

“Be fearful when others are greedy and greedy when others are fearful”

– Warren Buffett

Date of next meeting:  19th   October 2016

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
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By Mark Fletcher 31 Jul, 2017
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By Mark Fletcher 01 Jul, 2017
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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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