Quarterly Investment Comment

Quarterly Investment Comment: Q4 2014

Review

Following the excellent performance of equities in 2013, the results so far this year look restrained, particularly in the UK and Europe. However, North America continues strongly, achieving 9.1% this year to date.  Fixed income has offered good returns thus far, particularly in the UK, where government debt delivered 4.3% returns in Q3.  UK property has continued to perform well and we do expect continuing growth as the economic recovery spreads throughout the UK.  These performances illustrate the advantages of a well-diversified portfolio.  The markets shrugged off Ukrainian and Iraqi tensions, yet listened to central bankers.  For instance, the ECB disappointed markets by failing to give clear details about the size of their projected interventions.

Market News

It was back to business for the UK, after Scotland voted ‘No’ in the referendum and we remained a United Kingdom, albeit with concerns on the constitutional ramifications of voting by regional MPs.  Top UK 100 Companies shares saw a light relief rally after the results came through.  Sterling also strengthened overnight but retreated come market opening the following day. The uninspiring response from the market reflected the fact that a ‘No’ result had been priced in already.

The UK Economy grew faster than previously thought over the second quarter.  The Office for National Statistics (ONS) reported that the economy expanded 0.9% from April to June, driven by the services and construction sectors.  However, stock market developments were subdued.  The contributing factors were global unrest, including surprising continued demonstrations in Hong Kong; disappointing Chinese data in terms of GDP and consumption; and British supermarket earnings warnings. The Top UK 100 Companies closed around 6,620 at the end of the month.  UK house prices dropped for the first time in 17 months in September, with Nationwide reporting a fall of 0.2%.  Furthermore, Labour leader Ed Miliband announced a plan for a mansion tax on houses worth £2 million, should the party come into power next May.  Chancellor George Osborne announced a partial scrapping of the pension ‘death tax’: the changes allow pension funds to pass tax free to heirs if death occurs before age 75, or a reduction from 55% to 45% if death occurs after age 75.  The new flexible drawdown rules for pensions will take effect from April 2015.

Turning to the United States, US Q2 GDP grew at an annual rate of 4.6%, faster than expected, and the Dollar has strengthened correspondingly.  Central Bank policy remains on track to complete tapering in October.  The ‘Bond King’, Bill Gross, stepped down from his founding role at PIMCO – $23.5 billion of investor funds exited the company at the same time. Commodity prices kept falling, as America announced that they had overtaken Saudi Arabia in terms of petrochemical production, with Brent Crude Oil (November delivery) descending to $92.01 a barrel, the lowest price for 18 months.

The key news out of Europe was that the ECB revealed further information on the asset-backed securities and covered bond purchase programmes, stating that the programme will last at least two years with purchases starting in the fourth quarter of 2014.  Despite the continuing declines in European indices, many good European companies continue to shine with global exports, for instance: Novo Nordisk, Coloplast and SAP.

In corporate news, easyJet saw its price climb after promising to increase their dividend payout ratio to 40% from 33%. They also announced an order of 27 further aircraft, boosting confidence over the firm’s future growth. ASOS released their third profit warning in under a year, highlighting poor international sales as a key issue.  De La Rue, the bank note printer, issued a more surprising profit warning, adjusting guidance for pre-tax profit this year from a slight increase to a 23% fall.  Chinese e-commerce company Alibaba had a debut on the New York Stock Exchange at $92.70 per share – an astonishing 36% jump from the IPO price of $68 per share.  Despite Apple reporting record sales of the iPhone 6 and iPhone 6 Plus, the company share price was hit by consumer complaints that the latter model was susceptible to bending.

Outlook

In summary, given expectations of rising interest rates in the UK and USA, we think that equities and property continue to be more attractive than bonds.

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.