Investment Comment March 2015

In the UK, the Top UK 100 Companies ended February by setting new record highs at 6,958, breaking the previous record of 6,950, which had stood since the last trading day of 1999. This move reflected improving sentiment in the UK. Manufacturing confidence is high, with the PMI data rising to 54.1, beating analysts’ expectations. The UK General Election looms closer, with only two months remaining until the vote; however, this political uncertainty has not yet triggered a negative reaction in the markets.

Plans for the UK government to sell its stake in Eurostar continue apace, with the deal likely to be concluded before the election. Balfour Beatty, the infrastructure company, made a move into property development, announcing it would develop homes in the former London Olympic site. Utilities came under pressure, with Centrica announcing a dividend cut due to commodity price changes and Severn Trent cutting its dividend after regulatory action. In mergers and acquisitions news, GlaxoSmithKline and Novartis concluded an asset swap deal originally announced last year, as well as announcing a joint venture; GSK plans to return approximately £4bn to shareholders as a result of the deal. Rexam was the target of a takeover bid by the US-based Ball Corporation in a £4.4bn deal; a break clause means that Rexam shareholders will benefit even if the deal is blocked by competition authorities. Despite pressure on its stock price, Dialight posted a revenue increase of 22%.

In Europe, Syriza and the Troika reached a bridging agreement to provide funding to Greece until the end of June. This was greeted with much relief in global markets, as failure to reach a deal would have precipitated a default on Greek debt. Concern continues, though, that this agreement merely ‘kicks the can down the road’, setting up another showdown in a few months. France’s factory figures showed a greater than expected contraction at 47.6, but this was to some extent balanced by improvements in Germany. Overall, stocks in Europe performed well, with the Eurofirst 300 climbing 6.38% over the month, helped by imminent QE.

News was also good from the US, with the S&P 500 up 5.87% during February, recovering strongly from a fall the previous month. The Fed reiterated its position on interest rates, and the market continues to watch for the first rise in the middle of the year, which would make the US the first major economy to raise rates since they were cut during the crisis. Supported by the expectation of diverging interest rate policy, the US dollar remained strong, with some commentators beginning to see signs of this harming the US economy. Despite the predictions of rising rates, inflation remained low.

In Japan, CPI growth dropped to 0.2%. This led to increasing concerns that inflation would turn negative in the second quarter of this year, especially as CPI for Tokyo (excluding food, energy and tax rises) was -0.3%. However, Abenomics continues and Kuroda, governor of the Bank of Japan, said that policy would be eased further if necessary to hit the inflation target of 2% in the medium term. The Nikkei 225 was up 6.52% in February. In the wider Asia-Pacific region, markets were encouraged by a cut in the People’s Bank of China’s reserve rate.

Overall, we feel bullish for UK investors, with the UK economy performing well and increased potential for M&A activity, albeit with the potential for some volatility around the election.

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.