Quarterly Investment Comment

Quarterly Investment Comment: Q1 2015

Review

US stock markets continued their strong performance in the last quarter of 2014.  In Japan, the Nikkei 225 also performed well.  In the UK, the stock markets performed less well, but gilts offered good capital growth, and yields remained very low; property also offered very good returns.  Central bank actions (or expected actions) continue to move the markets, for example in Europe, where the ECB is likely to increase the scope and amount of its easing programme.  The oil price proved to be a very large factor in the final quarter of 2014, with an unexpected and significant drop from around $91 a barrel to about $53 a barrel (WTI spot prices) receiving substantial attention in the markets.

Market News

The UK economy continued to grow, achieving a respectable 0.7% in Q3 2014.  Growth figures for Q2 2014 were downgraded slightly to 0.8% (from 0.9%).  The Autumn Statement, at the start of December, confirmed the forthcoming changes to pensions.  The Chancellor also announced a major overhaul of stamp duty, abolishing the single slab system and replacing it with a tiered system.  Prime minister David Cameron threw his weight behind the ongoing trade talks between Europe and the US, arguing that this process should be accelerated. Most UK banks successfully passed the BoE stress test.

In the US, the economy grew strongly. In Q3 US GDP grew at an annualised rate of 5%, the greatest increase in a decade.  The dollar continued to strengthen, with the US Dollar Index closing at its highest level for several years.  The oil price fall will impact shale gas production, but should stimulate consumer spending. The US has announced that it will begin exporting oil, which is likely to have the effect of keeping oil prices low.

Whilst the economic performance in Europe remains concerning, markets are supported by the hope of ECB stimulus.  The President of the ECB Mario Draghi has made it clear that this action will be considered early this year, and that the risk of deflation has increased.  There is concern about the election in Greece and the possibility of another eurozone crisis as a result.

In Japan, Shinzo Abe retained the post of prime minister after winning a snap election which was widely viewed as a referendum on his economic reforms.  However, after Christmas, data showed that core CPI had fallen to a 14-month low (0.7% in November, excluding tax rises), emphasising how slowly the Japanese economy is responding to stimulus.

Despite the People’s Bank of China cutting the bank rate in November, market interest rates rose in China.  This has caused speculation of further easing as the PBoC seeks to control market rates.

In corporate news, companies in the oil and gas industries were hit by the fall in the oil price.  Tesco continued to struggle, issuing a further profit warning.  Reckitt Benckiser spun off pharmaceuticals subsidiary Indivior, which began trading on the London Stock Exchange just before Christmas.  BT announced it was in talks to buy EE, causing the BT share price to rise to a near 14-year high.

Outlook

Given continuing economic growth and the expectation of interest rate rises in the US and UK, equities continue to be more attractive long term investments than bonds on the basis of income yield and potential for capital gain.  Interest rate rises in the UK mean that capital returns on UK property are likely to be less attractive in 2015 than they were in 2014.  This varied performance across asset classes highlights the need for a balanced portfolio.

 

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.