2015 Year to Date
Markets overall have shown a strong year to date performance and we have seen this reflected across our portfolios where we are now ahead of our benchmarks. Last year both a Chinese growth slowdown and a fall in oil prices were seen as major negatives and weighed down on markets, however this year has seen these turn into a more positive view.
A number of our high conviction trades have seen strong returns, namely our holdings in Asia, Europe and the UK. Whilst we expect some short term volatility and market corrections, we generally still feel that the best returns to be had are from stock markets and not from other asset classes.
While we remain positive on equities, recent economic data has shown that growth is still not coming through, and it is this which has led us to raise some cash within the portfolios. We have taken some profits and are now actively looking for an attractive re-entry point. We do not expect to be holding cash for a sustained period of time.
Following the recent General Election, the market has reacted positively to news of a majority Conservative government leading to a rise in the main FTSE 100 and FTSE 250 index. Sterling has been a beneficiary of the result, strengthening against most major currencies. Whilst we are currently positive on the UK, we will be looking to see whether the impact of a looming EU referendum impacts on sentiment and we will adjust our attitudes / holdings accordingly.
The funds which we hold are mainly exposed to the domestic economy through small and mid-cap companies. We feel that these will benefit the greatest following the election and therefore provide us with the best returns. We are happy with our current holdings in this sector and not looking to make any changes at the present.
FTSE 100 Chart
In my last note I made reference to European markets as an area we felt would surprise on the upside in 2015. Year to date this has proven to be the case with our holding in the Invesco European Income fund delivering returns of over 12% in the last 6 months. Whilst growth in the Eurozone remains sluggish, the combination of Euro weakness and low energy prices has provided a significant tailwind to Exporters.
The US market has performed strongly and experienced strong returns over the last few years, which has increased the chance of an interest rate increase. We do however feel that the strengthening of the US dollar has probably delayed it.
You can see from the chart of the S&P 500 that the last time there were concerns of an interest rate increase, the market sold off quite aggressively (October 2014). While we do expect a short term correction when interest rates are increased, we think that it will not be as aggressive this time round.
We currently remain positive on this market, however, over the next 6 months we may look to realise some of our profits and reduce our exposure.
S&P 500 Chart
Japan has been injecting an extraordinary amount of stimulus into the economy to try and promote growth and inflation. It is these stimulus packages which have led to a strong performance of the country’s stock market and simultaneous depreciation of their currency. Whilst being exposed to this market, we have owned a hedged share class which has protected us against currency weakness and this has proved to be a good decision.
The majority of 2014 saw Asian markets subdued due to poor economic data being released, predominantly from China. Longer term we believe the investment case remains quite strong, however, as can be seen from the Hong Kong chart the market has risen incredibly quickly which has led us to trim our exposure across our portfolios. We have now sold out of the more defensive Newton Asian Income fund from our lower risk offerings. As mentioned earlier, a portion of the cash which we currently hold is likely to be redeployed into this space.
Hong Kong Chart
The Fixed Interest market is our main area of concern at the moment. Whilst we do not expect a rate rise in the near term for both the UK and Europe, the expected increase in the US cannot be far away.
We have reduced our exposure to larger fund management groups, which we previously held, as we have concerns that when the market ‘sell-off’ occurs there will be significant liquidity issues in these funds for non-government debt holdings. We have been gradually reducing our bond holdings across all our portfolios and will continue to do so over the coming months.
Over 2015 has provided a strong first few months and we think that there is still more to come. While we are positive on equity markets, we feel that the journey won’t be smooth with some modest corrections and volatility along the way.
We expect interest rates in the US to increase over the next 6-12 months however, it will take a number of years to get back to the historical longer term average of 3%.
As mentioned previously, the oil price has risen off its lows quite rapidly and this will remove one of the supports for the global economy.
We remain very positive on a number of select markets and we feel that it is equities which will provide the best growth opportunities over the next 12 months across all asset classes.