Investment Comment April 2016

Markets were broadly flat in the UK, Europe and Japan in March. The US was an exception, with the market rising 4.1% over the month. This stability was reassuring following the larger swings of recent months.

In the UK, the main focus of the month was the March 2016 Budget with some welcome measures for investors (such as the reduction in capital gains tax paid on shares) and, contrary to earlier speculation, no further alterations to pensions. The Budget was covered in more detail in our special note (Budget Report March 2016) which can be found on our website. Talk of a possible bubble in residential property continued, with house price data from the Office of National Statistics showing prices rose 7.9% in the year to January 2016. Based on the figures from that report, in some parts of the country it could take a single person an average of 46 years to save a deposit on a typical house.

UK economic data was mixed. Manufacturing PMI was up slightly (to 51 from 50.8) but Services PMI fell (to 52.7 from 55.6). Retail Sales increase year on year reduced to 3.8% (from 5.2%) but was still a strong, positive number. The Pound Sterling also had a mixed performance. Following recent falls it was up 3.2% against the US Dollar and 3.1% against the Yen. However it fell -0.9% against the Euro.

The news of the closure of the Tata steel plant in Wales dominated UK company news at the end of March. News of the closure of big manufacturing plants can create a feeling of economic decline. However, this is not reflected in the figures. Every day, the economy averages an additional 1,309 net jobs. Therefore, whilst the loss of 15,000 jobs at Tata is personally difficult for those workers, it is not a sign of significant problems in the British economy. BT avoided being ordered to sell Openreach during an Ofcom review in a result well-received by the market. Unilever settled the ongoing contamination dispute in India, ending uncertainty in that area.

Looking forward, the EU referendum is scheduled for 23 June and we expect the related uncertainty to cast a temporary shadow over UK markets. However, we consider that the UK is reasonably well positioned in either eventual scenario and we therefore are continuing to hold portfolio positions in UK equities.

Inflation in Japan ticked up to 0.3% (from 0%) in a possible sign that negative interest rates are having the desired effect of raising inflation. Elsewhere in the Asia Pacific region, China’s PMI was up at 50.2 (compared with 49.0 in February). This indicates that a recovery in sentiment may be under way following the gloom of recent months.

In Europe, the unemployment rate edged down to 10.3% (from 10.4%) in a positive sign for the continent. Inflation remained negative at -0.1%. Mario Draghi, President of the European Central Bank, continues to indicate the ECB may act to create inflation, but no specific additional measures have yet been introduced.

Contrasting with the strong performance of the S&P 500, US economic data was muted in March. Nonfarm payrolls (the number of jobs added to the US economy in the preceding month) was down to 215,000 (from 242,000) and unemployment ticked up to 5% (from 4.9%). These are considered key metrics by the Federal Reserve (the US central bank). Whilst the inflation rate remained healthy compared to most major economies at 1%, month-on-month inflation turned negative with a reading of -0.2% in a potential warning sign.

It appears that the world’s economies are emerging from the uncertainty and turmoil that marked the start of the year. This turn of events has already begun to reward investors who held through the volatility, as seen particularly in the S&P 500. This highlights the importance of holding a portfolio which matches your tolerance for risk, as well as a diversified portfolio giving you the opportunity to benefit from investment growth around the world.

As always, it is important to have a well-diversified portfolio invested in all the major asset classes, in line with objectives and attitude to investment risk.  Any changes in asset allocation should be gradual, because of the difficulty with precisely timing the markets.  Past performance is not a guide to future performance. The value of investments and the income therefrom is not guaranteed and can fall as well as rise due to stock market and currency movements. When an investment is sold, the proceeds may be less than the sum originally invested. The value of overseas securities will be influenced by the rate of exchange which is used to convert these to sterling. 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.

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.