Investment Comment October 2013

There is considerable concern about the US government shutdown and the pending debt ceiling deadline.  It is to be hoped that a settlement will be reached before the deadline. The underlying economy continues to recover and increasing self-sufficiency in energy will continue to benefit the US economy.  The eventual withdrawal of Quantitative Easing is likely to be seen in a positive light, indicating that the recovery is gathering pace.

Although economic recovery in Europe is slow, the valuations of many businesses are at historic lows.  Indeed the cyclically adjusted PE ratio of 14.9 in Europe (excluding UK) indicates that stockmarket returns are likely to be in excess of 10% per year for the next 10 years, if history is any guide.  The rehabilitation of Europe in investors’ minds has only just begun, and this provides an investment opportunity.

We remain positive on Japan, which is currently providing the best combination of earnings growth and low valuations in the world.  The Japanese economy grew at 4% in the first half of this year, the best of the Group of Seven (G7) economies.  Business confidence is at a 7-year high, and Tokyo won the 2020 Olympics which will help sentiment.

Overall, we continue to believe that the bull market in equities has further to go, because the earnings of many companies are growing well and valuations look reasonable, and even cheap in Asia.  The Royal Mail share offer in the UK is oversubscribed and looks like being a success.  Twitter is preparing for a stockmarket debut in the US, arousing considerable consumer interest in the market.

The yield of longer-term government bonds in the US and the UK has increased substantially over recent months, and this is likely to be the start of a trend towards higher interest rates.  As a result, we recommend continuing to move some of the fixed interest exposure from UK and US sovereign debt to include high yield and global bonds.

We believe that UK commercial property may be on the cusp of a cyclical recovery, providing improving returns as the economy continues to recover strength.

As always, it is important to have a balanced portfolio invested in all the major asset classes, in line with your objectives and attitude to investment risk.  Any changes in asset allocation should be gradual, because of the difficulty with precisely timing the markets.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.