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Investment Committee Meeting Minutes - September 2017

  • 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.

Covering the Month of September 2017

 UK

  •  The UK equity market closed the month marginally higher, despite significant volatility in response to global geopolitical developments.
  • Economic data indicated that UK GDP growth slowed to just 0.3% in the second quarter as continued weakness in sterling and Brexit uncertainty hit household spending and business investment.
  • UK retail sales rose 0.3% in July, marginally ahead of expectations, supported by strong food sales.
  • Non-standard lender Provident Financial announced its second profit warning in two months in an unscheduled trading update to the market. Given the circumstances, chief executive Peter Crook took the decision to resign with immediate effect. The company board determined that Provident Financial must protect its capital base by withdrawing its interim dividend declared on 25th July 2017 and indicated that a full-year dividend is ‘unlikely’. Into month-end, the group’s share price showed some recovery from the initial dramatic fall, albeit from a low base.  

US  

  • Despite geopolitical tensions, the struggles of the Trump administration, another terror attack in Europe and Tropical Storm Harvey, the US equity market ended August in positive territory.
  • While the month started off strongly, with the market touching a fresh record high on 8th August, US equities remained under pressure for much of the month.
  • On 17th August the US equity market recorded its biggest one-day fall since May as the North Korea stand-off and Charlottesville violence were followed by the disbanding of the US administration’s business councils and simmering concerns over stretched valuations.
  • The US equity market remained unsettled as concerns around growing political risk dominated. Investors rushed to so-called ‘safe-haven’ assets after North Korea launched a ballistic missile that flew over Japan and President Trump responded by saying that “all options are on the table”
  • By the end of the month, though, it was Tropical Storm Harvey (initially a hurricane) which had the biggest impact on the US equity market as it battered the US Gulf coast with historically heavy rain.
  • Energy was the worst performing sector as much of the drilling and refining activity in the area came to a halt. Financials were also negatively impacted, particularly insurance stocks, as concerns grew that flooding from Harvey would lead to big losses. Consumer discretionary stocks, particularly retailers, were also in negative territory, showing the pressure that online retailing is putting on bricks and mortar businesses.
  •  In contrast, the IT sector continued to rally, helped by investor enthusiasm ahead of the launch of Apple’s new iPhone, and utilities gained from their perceived ‘safe-haven’ status.
  • By the end of the month, markets appeared to take courage from a larger-than-expected revision to GDP growth. Data showed that the US economy expanded at an annualised rate of 3% from April to June (revised from an initial estimate of 2.6%) – the strongest growth in two years as household spending and investment improved. 

EUROPE 

  • European equity markets ticked down in local currency terms, but rose in sterling terms as the Euro continued its upward move in August. Relative to the British pound, the Euro climbed to the highest level in eight years, while versus the US dollar, the Euro crossed the 1.20 threshold this month for the first time since January 2015.
  • On a sector level, the utilities sector was the strongest performer in August, bolstered by a surge in European power prices. This was followed by the health care and consumer goods sectors. Meanwhile, consumer services led detractors relative to the overall market, followed by telecommunications.
  • On the macroeconomic front, GDP figures showed the European economy gathering more pace in the second quarter. Eurozone GDP growth stood at 0.6% in quarter two, up from 0.5% in the first quarter.
  • Particularly remarkable was the broad-based nature of the upswing, which is finally starting to spread across the 19-nation region. Germany, the Euro area’s largest economy, is no longer the sole catalyst behind this recovery, but other European countries are also making a notable contribution.
  • GDP data from the second quarter 2017 showed Spain growing at its strongest pace in almost two years. Exports and investment have led France to its strongest continuous GDP expansion since 2011, while the Netherlands posted the fastest GDP growth since the end of 2007. Moreover, Italy, a country that has lagged the pickup of its peers, is now showing encouraging signs and is expected to grow GDP by over 1% this year for the first time since 2010.   

ASIA & EMERGING MARKETS 

  • Asian equity markets ended the month higher for an eighth consecutive month, all the more impressive given the increase in geopolitical tensions on the Korean peninsula.
  • China’s equity market outperformed, thanks to generally better than expected corporate earnings and further signs of resilience in the underlying economy
  • Hong Kong’s equity market also made solid gains led by property and bank stocks after better than expected earnings.
  • Thailand’s equity market enjoyed its best monthly return year-to-date, with GDP growth in the second quarter beating expectations, while exports growth also surprised positively, although an absence of investment spending remains a concern. Malaysia’s second quarter GDP growth also beat expectations and the current account surplus was sustained.
  • On the other hand, the Philippines and South Korea were the region’s worst performing equity markets over the month.
  • In quarter two India’s GDP growth slowed to 5.7% from 6.1% in the prior quarter, which was weaker than had been expected.
  • It was another positive month for emerging equity markets as they extended year-to-date returns.
  • Latin America led the gains, drawing support from stronger than expected economic releases, positive political developments and a continued improvement in commodity prices. Equity markets in EMEA (Europe, Middle East and Africa) also enjoyed stellar gains with Russia, Hungary and Poland being the country winners.
  • Emerging market currencies gained in value versus the US dollar as expectations of a possible US interest rate hike in September receded significantly following the release of a subdued US inflation report in August.
  • From a sector perspective, financials, materials and healthcare came out on top.  

JAPAN 

  • Japan’s equity market ended the month marginally weaker in local currency terms due to tension between the US and North Korea and ongoing political uncertainty in the US.
  • Overseas risks offset tailwinds such as solid corporate earnings momentum and a strong domestic economy.  

FIXED INTEREST 

  • At the start of the month, geopolitical concerns surrounding the Korean peninsula raised uncertainty and the level of market volatility. This led the market to prefer so-called ‘safe haven’ assets. Government bonds outperformed corporate bonds and investment grade outperformed high yield.
  • The ECB sought to downplay expectations of a significant policy change announcement. It was therefore not surprising that Draghi’s speech contained nothing new.
  • Of more immediate concern to the market is the US debt ceiling debate. That is the debate surrounding legislation, which needs to be passed so that the US Government can continue borrowing and not default. Reflective of the market’s concerns, US Treasury Bills due to mature in October 2017 (the expected deadline for the debt ceiling) are now trading at much higher interest rates to bills maturing in the months after.
  • Corporate bond issuance levels in the eurozone were unchanged versus levels last month. However, there was a fall in sterling issuance, which was also lower than a year earlier. This in part reflects the fact that August 2016 sterling issuance was much higher following the Bank of England’s announcement last year that it would buy sterling corporate bonds as part of its Quantitative Easing programme.


ROUND UP FROM PRESENTATION BY JP MORGAN

VIEWS OF DR DAVID KELLY – CHIEF GLOBAL STRATEGIST

  •  Don’t let how you feel about politics influence the way you invest
  • There is a need to recognise how good things have been. The next 5 years cannot be as good – sailing into a “headwind”
  • The average balanced portfolio has returned +9% per annum over the last 10 years
  • Expansion in the US continues to be slow and steady – now in its 99 month, but growth is on a lower trajectory
  • US unemployment has fallen from 10% in 2009 to 4.4% which is basically full employment
  • Wages haven’t risen – employers have had the power and trade unions have been squashed
  • Inflation will tick up and central banks will gradually tighten
  • US growth prospects likely to slow
  • Dual impact of fiscal stimulus and raising interest rates has resulted, economically, in the foot being applied to the brake and the accelerator at the same time
  • David thinks there may be an interest rate rise in the US before the end of the year, plus three rate rises next year
  • Confidence is rising in the eurozone
  • European consumer confidence is at its highest level since May 2007. Growth rate is picking up and David expects the ECB to start to taper Quantitative Easing in 2018
  • Stocks look cheap compared to bonds
  • UK growth may slow down going forward
  • Sterling has depreciated in the last 10 years
  • Inflation has picked up but wage growth has not
  • David’s view is that interest rates will eventually rise but Bank of England may wait until Brexit negotiations are further ahead and the future path is clearer
  • Emerging markets growth is leading to a brighter earnings outlook
  • China numbers looking ok
  • David feels that global growth will continue in 2018 – eurozone and emerging markets to lead the way
  • High values in bonds and equities may limit future returns
  • Geopolitical and other risks underscore the need for broad diversification

  What do we think?

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. As the storm season reminds us, a lull is no cause for complacency.

There is a growing sense of optimism around the global economy, but that doesn’t necessarily mean that investments will grow at the same time. Markets tend to be priced on a prediction of what is to come and many economists think that an economic upturn is already priced in to investments. Investments that are typically considered as safer ones, focusing on income returns, have had a good run as investors chase yield and pay more and more for the same income. But we also hear many economists state that other investments that have been unloved for years may be due their turn in the spotlight. We may be getting back to a point where good active fund managers might deliver better value for money than lower cost but less active managers.

 

Date of next meeting: 18th October 2017

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

  • 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.


US

  • 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.


EUROPE

  • 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


ASIA & EMERGING MARKETS

  • 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.


JAPAN

  • 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.


FIXED INTEREST

  • 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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