Investment Comment December 2013

Positive economic news is emanating from a number of directions and taking these and other factors into consideration, we view the equity markets in the developed nations favourably.  Emerging markets have suffered this year with fears surrounding the Fed ‘taper’ but we consider that there are buying opportunities here.

The World Trade Organisation (WTO) won a victory in Bali on December 6, with all member nations signing a “trade facilitation” agreement.  The agreement will set common customs standards and streamline the global flow of goods, lowering international trade costs potentially by 10% and boosting economies over the coming years as reforms are implemented.

In the U.S.A, unemployment has decreased to 7%, the lowest rate in five years, and non-farm payrolls rose by 203,000, higher than the 180,000 that Wall Street expected.  The New York based Standard and Poor’s Index (S&P 500) has recovered to over 1,800 points, higher than the previous high of March 2007.  This year sees the largest rise in U.S. equities since 2004.

In the U.K., the Chancellor, George Osborne, revised forecast 2013 GDP growth from 0.6% to 1.4%, with a forecast of 2.4% for 2014.  He said that borrowing would also be less than expected, at £111bn (2013), down from £159bn (2009).  Further stimulus included £130bn of mortgage guarantees and an extra £3bn of infrastructure investments.  Investors should note the Chancellor’s guidance to keep interest rates “lower for longer”.  As from April 2014, Stamp Duty on AIM shares will be abolished and ISA limits increased to £11,880.  The UK Purchasing Managers Index (PMI) rose from 56.6 to 58 in November, the fastest growth in 19 years, with a rebound in construction activity.

The Eurozone PMI signalled growth for the fifth month, led by Germany and Ireland, although France’s economy contracted.  Italy remained in recession for the tenth consecutive quarter.  Valuations across Europe provide investment opportunities.

Chinese exports rose 12.7%, and the government reiterated that they would meet their target of 7.5% growth for 2013.  Inflation fears were allayed by food price decreases in November.  Political risk in the region rose as both China and South Korea each asserted increased Air Defence Identification Zones which partially over-lapped.  India’s Sensex stock market reached new highs after clear results in the national elections and GDP growth remained stable at 4.8%.

As a sign of further market optimism, Hilton Hotels plans a $2.3bn IPO.  However, the possibility of the “taper” in the Fed’s “Quantitative Easing”, which could be announced in Q1 2014, is still in investors’ minds, bringing concerns of a decrease in liquidity.  Any such taper would start to signal an end to ‘cheap money’ and thus investors should look to reduce fixed interest positions, especially Sovereign debt.

As always, it is important to have a well-diversified portfolio invested in all the major asset classes, in line with your objectives and attitude to investment risk.  Any changes in asset allocation should be gradual, because of the difficulty with precisely timing the markets.

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.