Over the last few months markets have continued to rise choosing to ignore any negative news and as a result our portfolios have performed well. We have recently taken some of the profits we made and moved this money to cash. The reason being that we felt there could be a setback and therefore wanted to protect profits already made. This strategic move also helps control your investment risk. We may have been slightly early selling our US holding and UK Smaller Companies holding, but are very comfortable that it was the right call.
As well as controlling risk this way, we also try and hold positions that will make a difference to your outcome. A good example being Invesco Perpetual Global Financial Capital Fund, a financials bond fund we have held since launch and that is up 50% to date. We have never liked bank shares much as we consider it very difficult to accurately value their worth. However after they were forced to strengthen their balance sheets, the type of holdings in this fund were much more attractive and so we thought it was an unusual combination of income return and capital appreciation prospects at that time. It has worked very well.
We don’t like holding cash, other than as a short term tactical decision as it does not give us any return, but we hope it gives us the chance to buy back into markets after any setbacks at a cheaper price. We review this decision regularly and still feel currently the risks of a short term set back are increasing. Long term we remain happy that stock markets can continue to provide enhanced returns but as always asset allocation will be important to our outcome.
We continue to choose not to hold any European exposure and although we can see it’s cheap by comparison with most markets we feel that until there is a more permanent fix to some of the problems surrounding the Euro, the risks are too high.
We still see no signs that general interest rates are set to rise in the near future and look set to be held at historically low levels until there are more signs that the economy is recovering and growth is returning.
The one major change that has occurred is an aggressive change in policy in Japan by the Government and this has led to very strong short term performance. Japanese consumer spending rose 5.2 % in March this year, its highest year on year growth in 9 years. We are likely to now consider including Japan in our holdings as the investment outlook is changing rapidly for the better. We need a fund that has a heavier exposure to the domestic economy rather than exporters as without global growth this will continue to be difficult.
As the Hong Kong chart (below) indicates, Asia and in fact the majority of all emerging markets have under performed in the first quarter. The regional equity funds that we hold have however performed very well, primarily because the funds hold large cap stocks with strong brands and strong management with both high relative earnings and dividend yield.
Hang Seng, Daily Chart (weak first quarter)
From the charts below of the FTSE 100 and the S&P 500, both markets experienced falls in the period March and April and then moved higher again. The drop in the Hong Kong market was more significant in the same period.
We currently feel that the markets are due a short term reversal in the summer and we will be looking to use this to redeploy our cash investments.
We have no significant changes in our views since our last update. We continue to view stock markets as attractive in the long term and remain slightly wary of fixed interest markets.
FTSE 100, Daily Chart (two setbacks in first quarter)