Investment Comment December 2014

The US markets continued to encourage investors as the Dow Jones and the S&P 500 both reached all-time highs, shrugging off some slightly weak data going into the Thanksgiving weekend. Following the US mid-term elections, gridlock remained a concern as the Republicans control Congress and President Obama has two years left in the White House. However, with the possible benefit that government interference in business will be limited, the markets do not seem overly concerned.

In the UK, inflation was below the Bank of England’s expectations, in part due to the continuing fall in oil prices. At the Quarterly Inflation Report, the Bank of England pushed out further the prospect of the first rate hike, suggesting they would raise rates in Autumn 2015. All eyes turned towards the Chancellor’s Autumn Statement. UK GDP growth was revised upwards for this year to 3%, allowing the Chancellor to maintain a positive outlook ahead of next year’s election. There were major changes to stamp duty on property. With immediate effect, this will now be an incremental tax. In addition, the percentage paid on the highest bands will be much greater. Taxation of multinational companies was reformed, with specific tax on the UK profits of multinationals being introduced on companies which try to move profits out of the UK.

The Top UK 100 Companies has continued its rapid recovery of the losses in the early part of October, reaching beyond 6700. However, oil-related stocks continued to suffer losses as the oil price dropped, with OPEC not cutting production. On the other hand, there is an overall economic benefit to consumers from lower fuel prices. The yield on the 10 year Gilt reached recent lows, going below 2%.

Reckitt Benckiser announced the spin-off of Invidior, which it valued at over £2 billion. The IPO of Virgin Money (the successor of Northern Rock) went well, valuing the company at £1.25 billion. Stagecoach benefited from winning the East Coast rail franchise.

Eurozone inflation fell to a 5 year low of 0.3% and there is an expectation of additional ECB action to stimulate the economy. These actions are likely to be beneficial for stock market returns in Europe.

Japanese markets have held up well despite the country slipping back into recession. The Bank of Japan has continued QE in an attempt to stimulate inflation and pull Japan out of its prolonged economic challenges as part of Abe’s three arrows: monetary easing, fiscal soundness and policies directed to spur growth and investment.

In other markets, China’s central bank cut one-year lending rates to 5.6%, slightly buoying commodity prices on the likelihood of increasing demand. This indicated that the markets were hopeful the Chinese stimulus would feed through into the global economy, improving growth prospects in more developed economies. The Hong Kong-Shanghai Stock Connect scheme suggested further potential economic liberalisation in China as it is being described as a trial run for integration between Hong Kong and mainland Chinese markets by the Chinese Securities Depository and Clearing Corporation. Were this to occur, it is likely there would be significant new opportunities in that country.

We continue to believe that there is opportunity to be found in equity markets. Equities are yielding more than bonds and will benefit from improving economic performance, as well as offering favourable valuations in certain areas.

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.