Investment Comment March 2014

Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”  Warren Buffet’s latest Berkshire Hathaway investment letter reminds us not to be overly fixated on the short term worries about Ukraine and emerging markets including China.  Rather, the intelligent investor focuses on investing for the longer term, including investments in businesses which are profitable with sound strategies.

UK company earnings results have been largely positive in the current reporting season, reflecting the improving economy.  It is five years since interest rates in the UK were reduced to 0.5%. Mark Carney previously stated that interest rates would remain stable at least until the unemployment rate fell below 7%, which could well happen during 2014.  Even if interest rates are not raised until 2015, as seems likely, corporate bonds and long-dated gilts continue to be relatively unattractive.  Broadly, this environment encourages people to buy equities instead, which is likely to be favourable for the stock market.  The banking sector remains in turmoil, with the foreign exchange scandal potentially affecting several UK banks.  The remaining Government shareholding in Lloyds Banking Group may be privatised during 2014.

Housebuilders were affected by the wet weather in the UK, prompting a drop in output from the six-year high reported in January, but we expect further gains from this sector going forward.  Civil engineers are profiting from projects related to flood damage.  Some commercial property funds and Real Estate Investment Trust (REITS) have provided good returns over the last year, and we expect this to continue.

As a result of the Ukrainian situation, Russia’s MICEX stock index has dropped 11% in 2014, with talk of sanctions against Russia.  The eurozone economy is showing signs of recovery, with the Purchasing Managers’ Index (PMI) showing a score of 54.3 in February, indicating expansion.  Mario Draghi, President of the European Central Bank (ECB), has declared the eurozone to be “an island of stability.”  The ECB decided not to add any stimulus despite low growth, and the Euro rose to 1.39 against the US Dollar for the first time since 2011.  It remains likely that the ECB will introduce some form of quantitative easing (QE) in due course to further stimulate growth.

The shale gas and oil industry in the USA is likely to provide a significant long-term beneficial effect to the US economy, which is advantageous for a number of UK companies.  There are signs that both the number of Initial Public Offerings (IPOs) and Mergers & Acquisition activity are increasing, reflecting improving economic conditions.

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.