Investment Comment January 2014

On December 18, Ben Bernanke announced that the Fed would start to reduce Quantitative Easing.  The ‘taper’ reduces monthly asset purchases by $10bn from $85bn to $75bn.  The Fed also re-committed itself to an accommodative monetary policy stating it would keep the benchmark interest rate low until unemployment decreases to 6.5% (currently 7%).  GDP growth for 2013 was revised upwards from 3.6% to 4.1%, a welcome sign that the world’s largest economy is growing well again.

The U.K. economy has also grown faster than forecast.  The Office for National Statistics revised growth for 2013 up from 1.5% to 1.9%.  Standard and Poor’s affirmed their AAA credit rating for the UK.  December’s Purchasing Manager’s Index was 57.3, which although slightly lower than the 58 recorded in November, indicates a continued expansion in activity.  Good economic data raises the probability that Mark Carney, the governor of the Bank of England, may increase interest rates before his previous guidance of 2015.  Stock markets benefited from corporate earnings growth; the Top UK 100 Companies ended the year up 16% at 6,749, the Top UK 250 Companies was up 23% and the Small Cap Index was up 26%.  We continue to view UK equities positively especially in growth sectors.

The Chancellor stated that from April 2014, Venture Capital Trusts will no longer be able to offer investors enhanced share buy-backs.  Investors will, however, be allowed to hold individual AIM stocks in ISAs, which is likely to benefit this area of the market.  Many AIM stocks offer potential relief from inheritance tax after owning them for two years.

The European Union forecasts Eurozone growth of 1.1% in 2014, with unemployment to remain above 12%.  The European Central Bank’s ongoing ‘asset quality review’ of 130 banks will be vital for regaining trust.  At the same time, the trillion euro ECB ‘bank liquidity scheme’ will expire during 2014.  Nevertheless, we believe that European equities continue to provide selective opportunities for investors because of relatively low valuations. Global economic recovery particularly favoured peripheral Eurozone equity markets in 2013, with Greece, Ireland and Finland all returning over 30%.

China’s GDP grew at 7.6% in 2013.  Government driven infrastructure spending is being replaced by domestic growth, and this presents an opportunity for investors.  Chinese equities which are listed in Hong Kong are known as “H shares”.  Some H shares are trading at close to 10 year lows.  They are an inexpensive way to gain exposure to smaller Chinese companies, because mainland Chinese investors are not yet allowed to buy H shares, and some investment trusts are taking advantage of this.

Emerging markets saw some pain in 2013, with Peru, Indonesia, Chile, Colombia and Turkey’s stock markets all losing over 20%.  Many feel that emerging markets may outperform in 2014, reflecting the longer term growth of these economies.

The increase in 2013 IPO activity (up 27% to $163bn across 864 global transactions) indicates an appetite for equity investing during 2014.  Overall, we believe the continuing global economic recovery will be beneficial for investments.

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.