Investment Comment March 2016

February saw some stability return to the stock markets following the volatility of January. In the UK, for example, the Top UK 100 Companies fell slightly as the month began before finding a bottom and climbing to open in March at 6,078. This amounts to a recovery of over 500 points in a little over two weeks, demonstrating the importance to investors of remaining in markets during volatile periods in order not to miss out on rapid recoveries.

UK economic data has continued to point towards consumer-led growth. Year-on-year retail sales were up 5.2% (compared to a previous reading of 2.3%), showing consumers continue to increase their spending well ahead of inflation at 0.3%. However, there are continuing concerns about the health of the UK housing market. Information from the Council of Mortgage Lenders revealed that more first-time buyers (58% now compared to 42% in 2007) require mortgage terms greater than the traditional 25 years, suggesting many are overstretched even with interest rates remaining at record lows.

Looking at UK companies, Astra Zeneca received European approval for a new lung cancer treatment, identified by analysts as a potential key driver of growth. Although Rolls Royce continues to struggle, its restructuring plan has been well received and in the long term they are expected to benefit from a greater focus on civil aviation. BT benefited from the news that it will be allowed to keep control of Openreach, although they may be required to restructure it somewhat.

Commercial property in the UK has continued to perform well with good occupancy and rising values. If interest rates rise later this year, the performance of property funds may be expected to lessen for 2016.

Over the last month the UK Gilt curve has flattened with a slight increase in short term rates and a lowering of long term rates. Expectations of the timing of a rate rise are being pushed further out. The Bloomberg UK high yield corporate bond index has moved in line with equities, dipping at the start of February before recovering.

In the US, the S&P 500 has also shown sustained recovery from its lows. Some commentators had expressed concern that the strengthening US Dollar would significantly harm exports. However, the latest figures show exports only down slightly (-0.4%). The Federal Reserve’s key indicator continued to improve, with unemployment falling to 4.9%.

Far Eastern markets also saw calmer conditions after a hectic start to the year. Whilst not following the rapid recovery of Western markets, the Hang Seng index is slowly stabilising. China continues, however, to be the focus of international market attention as the transition is managed from a manufacturing economy, where growth is investment-led, to a services economy dependent on consumer spending. In Japan, the main economic news was the introduction of negative interest rates (following a decision at the end of January). On the day negative interest rates were implemented the Nikkei 225 rose over 1000 points.

The Eurozone also experienced a fall in inflation to -0.2%. This is leading to increased pressure on the European Central Bank (ECB) to further stimulate the economy. It is hoped that a combination of a continuing low oil price and possible ECB intervention will improve the economic outlook in the area.

In conclusion, the markets are considerably stronger now than at the end of January. In particular, the US and UK markets are recovering. This shows the advantage of a diversified portfolio, which allows investors to benefit from growth wherever it occurs. The recent volatility also highlights the need for strong financial planning: a good understanding of your attitude to risk will ensure your portfolio is well diversified so that you can benefit from market recoveries.

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.