Quarterly Investment Comment: Q1 2013

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Mario Draghi, President of the European Central Bank, 26 July 2012

Last quarter we drew attention to monetary policy as a driving force in markets at this time. For investors in risk assets, Mario Draghi’s speech on 26 July was probably the most important event of 2012. Pundits can argue as to whether the ECB actually has the tools at its disposal to back up Draghi’s statements, but the bottom line is that words matter. The reversal of psychology this speech engendered was on par with Federal Reserve chairman Ben Bernanke’s “Jackson Hole” remarks in late August two years prior when “quantitative easing” was first introduced.  Going into the fourth quarter it was only the Bank of Japan that looked out of place in this brave new world of open-ended monetary accommodation. But a landslide victory by the LDP in Japan heightened expectations for much more aggressive policy steps at the Bank of Japan (BOJ) as well. The incoming prime minister, Shinso Abe, is dead-set on reflating the economy and will choose a new governor of the BOJ in March who supports his views. One need only observe the collapse in the Yen to understand how seriously investors are taking Mr. Abe. At 88 Yen to the dollar, corporate Japan is already in much better shape and the impact on corporate profits should not be underestimated. In the USA, the Federal Reserve added USD 45bn in monthly treasury purchases to its existing mortgage-backed security program, and deployed an unorthodox “unemployment” target of 6.5% as a precondition for changing its current easy-money policy. Closer to home, the incoming governor of the Bank of England, Mark Carney, has even proposed targeting a nominal level of GDP growth. Monetary policy has not historically held such sway over markets, and the narrative will ultimately change. But for now a focus on central banks remains key.


How did Q4 play out in terms of asset class and market?

2012 proved once again that UK-based investors can benefit by deploying assets globally, with European and Asian markets outperforming the Top UK 100 Companies especially toward the end of the year. In Q412 specifically, elevated risk appetite drove high returns in most stock markets, with European assets (equity, credit and currency) the regional standouts in GBP terms. Sovereign yields and credit outside Europe were on the defensive though as US investment grade and high yield credit yields drifted up. In commodities, crude oil fell back as perceived Middle East risks failed to materialize and the supply of shale out in the US continued its inexorable rise. Gold fell 6% for no particular reason. Perhaps dissipating fear and the ability to deploy capital profitably in cash flow positive assets held it back. We note the continued favourable backdrop for gold as real interest rates remain solidly negative in the US and Europe.

There was one major exception to generally buoyant global stock markets: US stocks reversed their leadership position as monetary policy fatigue and worries about the fiscal cliff combined with high valuation to produce a negative return. Outside North America, risk appetite continued strong in Europe and broadened out to encompass Asia. Chinese stocks flourished as the economy there bottomed, producing the best returns amongst major markets. In Japan, the aforementioned political change engulfing that country drove exciting mid-teens percentage gains in Japanese stocks (though GBP returns were held back by weakness in the Yen). These outcomes were captured in the regional allocation discussed last quarter and current trends, we feel, have not yet played out.

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.