Investment Comment November 2014

The IMF reduced global growth estimates to a “mediocre” 3.3% for 2014.  Central Bank action impacted markets more than fears around Ebola.  As the US and UK economies “decouple”, with better growth, they pass on the baton of accommodative policy to Europe and Japan.  The US economy grew 3.5% in Q3 2014, validating the Fed decision to end QE “Infinity”, with the approval to remove the final $15bn taper of monthly purchases.  The Bank of England pushed back expectations of rate rises until after the UK elections.  The ECB ended their Asset Quality Review, announcing that all except 9 banks had passed the stress tests.  The ECB also announced €82.6bn take up in the TLTRO (Targeted Longer Term Refinancing Operation).  The Bank of Japan bolstered the markets by communicating increased annual asset purchases from 60 trillion yen to 80 trillion yen (£454bn).  The Nikkei index jumped 5% on news of the increasing stimulus to a 7 year record at 16,413.  The positive initial market reaction belies the disappointing underlying economic data which gave cause for the increased stimulus (core inflation at 1% as opposed to a goal of 2%).  Likewise, slowing Chinese growth (below target at 7.3%) and the Hong Kong protests make us wary of investments there.  Citibank published “Cheap Oil QE” with Brent Crude Oil at $84 barrel, adding the equivalent of $1tn to the global economy.

The UK deficit rose to £11.5bn in September, 10% more than forecast.  Unemployment fell below 2m, at 6%, although fewer jobs were created than expected, while inflation dropped to 1.2%.  The housing markets paused for breath, as mortgage approvals fell to 61,267, the lowest level in a year.   Two million landlords own £1 trillion worth of houses, with an estimated 1/3^rd of homes rented by 2032, driving down expected rental yields.  Retail sales were down -0.8%, with the high street losing share to online retailers such as Boohoo.  The supermarket battle continues: Lidl sales rose 24.9% while Tesco sales fell 1.5%.  Tesco’s £263m profit shortfall led to the suspension of 8 senior managers.  In equity markets news, Aldermore Bank pulled an expected IPO, while Jimmy Choo reduced their price target, and Abbvie backtracked from the Shire deal due to tax reversion pressure.  GSK discussed selling an 80% stake in ViiV, valued at up to £15bn.  Qualcomm offered $2.5bn to acquire CSR, a Cambridge start-up.

Overall we believe economic recovery will continue for several more years, and slow growth will mean lower interest rates for longer.  Eventually there will be a growth-led upswing.  In the meantime equities yield considerably more than sovereign bonds, and this is likely to support equity markets.  Valuations also look favourable, particularly in Europe, and third quarter company results in the US have been positive.  Many markets are recovering, with the Top UK 100 Companies closing the month above 6500.  Cantab encourages the search for value, looking for long term appreciation, to ride out fluctuations.  As Benjamin Graham wrote in The Intelligent Investor: “The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizeable advances.”

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.