Investment Comment May 2014

Sell in May and go away? Take a vacation, but don’t sell if you are a long term investor.  Transaction costs and the difficulties of timing reinvestment surely cancel out any theoretical advantages.  There is a greater correlation with corrections of over 5% during the US presidential ‘mid-term’ election cycle, which coincides with the next six months.  However, US markets remain vibrant, and the US Fed continues to taper quantitative easing by $10bn per month.  Chinese relative GDP is set to be larger than the USA by the end of 2014, in terms of the real cost of living, in the World Bank’s calculation of Purchasing Power Parity (PPP).  China reported 7.4% growth (Q1 2014), slowing from a high of 11.9% (Q1 2009).  China’s slowing growth contrasts with accelerating growth in the United Kingdom.  In fact, high quality British companies stand to profit as emerging markets mature.

UK annualised GDP grew 3.1%, up from 2.7% the previous year.  April’s PMI was up to 57.3 from 55.8.  A range of indigenous firms reported increasing emerging markets revenues.  Standard Chartered Bank reported 90% of revenues from abroad.  Diageo, Unilever and Reckitt Benckiser all reported at least 40% of their revenues came from less developed economies.  Companies such as these have access to retailers around the world – which is very difficult to replicate.  They also have the supply chains and distribution power to place their established brands such as Guinness, Persil or Strepsils.  To establish the argument about the international love for British brands, there is a four month waiting list for new petrol Range Rovers in the UK.  This is because of predominately Chinese demand for robust prestige vehicles, in a nation which has only 6% car ownership.

Stalwart United Kingdom based exporters can positively harness demographic growth and the aspirations of growing middle classes.  However, exporters were impacted by the volatility of emerging markets’ currencies.  Weak currencies reduce the ability of clients to afford expensive sterling-based products, as well as reducing the contribution from repatriated foreign earnings back to UK producers.  Thankfully, the emerging markets’ currency weaknesses seem to be partially reversing at present.  This is one reason for the Top UK 100 Companies breaking through the 6,750 mark again.  The post-sell off recovery can be positively interpreted against the back-drop of lingering tensions from the behaviour of Russian dissidents in eastern Ukraine (the Top UK 100 Companies earns less than 1% of revenues from Eastern Europe).

The Pharmaceutical sector gave three recent examples of resurgence.  Circassia’s £200m London IPO in March set the tone, as the first pharmaceutical listing since 2006.  GlaxoSmithKline was paid £4bn by Novartis to swap their sub-scale oncology business for Novartis’ loss-making vaccines division, in what the markets praised as a ‘win-win’ solution.  Astra Zeneca declined Pfizer’s generous £60bn offer, despite a 25% premium.  Housebuilders also seem to continue to profit from escalating house prices.  Even after their recent fall, the Technology Stocks in the Nasdaq still beat the more generalist S&P 500 index over 3 years (78% vs 46%).  Fat Face announced an £168m IPO for May, although value stocks are back in favour at the expense of growth stocks.  In summary, Investors turned from seeking capital increase ‘at any price’ to safety at less expensive valuations.

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.