Investment Comment October 2016

The returns from non-UK equity markets look impressive. However, it should be noted that the returns quoted above are measured in sterling terms and so a part of the return is due to the effect of the move in sterling.

The falling value of the pound continues to be attributed to political events. After being triggered by the vote to leave the EU, the decline in the pound has continued following UK Prime Minister Theresa May’s announcement that any agreement with the EU must allow immigration controls, widely seen as indicating that the UK will leave the single market. The GBP-USD was also in the news following a ‘flash crash’ in the currency pair in the first week of October. Despite the uncertainty around the currency, business confidence remains healthy: both manufacturing and services PMIs indicate reasonable growth (manufacturing PMI rose to 55.4 from 53.3 and services PMI fell to 52.6 from 52.9).

In UK company news, GlaxoSmithKline disposed of its remaining shares in Aspen for £485m. Rio Tinto announced their intention to conduct a $3bn bond buyback as part of the plans to reduce debt and enhance efficiency. There were ongoing concerns over many companies’ large defined benefit pension scheme deficits: the government is looking at ways to adjust legislation to help parent companies struggling under the weight of these schemes.

Away from the UK, the news has also been dominated by politics in the form of the US Presidential election. It does, though, increasingly appear as if Clinton has an edge, with the most recent polls consistently showing her ahead and respected pollster Nate Sliver giving her a 77% chance of winning.

US economic data was less positive this month with nonfarm payrolls showing only 156,000 jobs added to the US economy (below the 167,000 added last month). There are some signs that inflation is returning, with the reading for August (released in September) showing inflation running at 1.1% (compared to a reading of 0.8% in the previous month).

In Europe, the economic discussion has focused on the banking sector – in particular the worries around Deutsche Bank. Following a large fine from the US ($14bn), there have been concerns that the bank may require a bailout. This has resulted in a downward slide in the bank’s share price. Most analysts believe that these concerns will not result in contagion because banks now hold much higher capital reserves and so are better able to absorb market shocks.

European economic data also shows an increase in inflation, although it remains low at 0.4%. The European Central Bank continues to run highly accommodative monetary policy, although concerns have been raised that it could soon run out of appropriate bonds to buy, resulting in a premature end to QE.

Looking to the Far East, the IMF’s Asia-Pacific department has expressed concern over China’s growing debt. Credit is reported to be 30 times GDP and exposure to shadow credit is high (nearly 600% of capital buffers at some banks). This is a cause for global concern as China’s growth is linked to the global economy (a drop of 1% in Chinese growth results in a drop of 0.2% in global growth according to the IMF’s analysis). On the other hand, the former IMF China mission chief says that the indicators are not yet at the dangerous levels seen before the Asia crisis of 1997 and that if China can control its debt then its ongoing expansion will be beneficial for the world.

In conclusion, there is a great deal of uncertainty in the global economy currently, but returns have been good, at least in sterling. It is likely that the current bull market in equities will continue, supported by economic growth and some inflation returning. A well-diversified portfolio can also provide some downside protection in case events take a turn for the worse.

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.