Investment Comment April 2014

Fragile spring blossoms promise that summer will arrive once more.  The first quarter was bumpy, with the Top UK 100 Companies trading in the range of 6450 to 6865.   Yet equity markets are proving resilient, recovering from dips as geopolitical risks subside.  Putin utilised Ukraine’s revolution to annex the Crimea, but he has ‘no intention’– for now, at least – of destabilising the region with further aggression.  A recession in Russia is unlikely to materially impact the rest of the EU, as Russia accounts for only 3% of global GDP.  The International Monetary Fund (IMF) dubbed Europe’s situation as ‘lowflation’ – that is, persistent low growth in prices.  The growth in the European Consumer Price Index dropped to 0.5% in March, despite German CPI growth increasing to 0.9%.   We are cautiously optimistic about European earnings growth.

In China, Premier Li Keqiang has acknowledged “difficulties and risks”.  However, the Purchasing Managers Index rose slightly to 50.3 (where any number greater than 50 is deemed to show growth in the economy) and China has announced new measures to stimulate growth.   Japanese Prime Minister Shinzo Abe increases consumption tax from 5% to 8% this month, tackling a budget deficit of 10% of GDP.  After a heady rise in 2013, the Nikkei’s performance has been weak so far this year.

In the US, profit margins from non-financial companies rose from 7.3% (2012) to 7.9% (2013) against a peak of 8.3%.  The new Federal Reserve Chair, Janet Yellen, continued the policy of reducing Quantitative Easing from $85bn to $55bn per month, announcing “this extraordinary commitment is still needed and will be for some time.”  It seems likely that U.S. interest rates will start to rise slowly from the middle of next year.   Overall we believe that the US economy is recovering well and company results are positive in the main.

In the Budget speech, the Chancellor presented economic figures, with the budget deficit down by a third and GDP growth rising, albeit he noted that previous targets have not been hit and timescales pushed back for achieving deficit and debt reduction.  He won favour with savers and pensioners by loosening pension restrictions.  Inflation faded to 1.7%, further decreasing the chance of a rise in UK interest rates before 2015.  Through increasing the flexibility of pension drawdown, the Chancellor targeted the £12bn annuities market, which will allow greater asset flows to those who administer Self Invested Personal Pensions (SIPPs).  Aberdeen Asset Management completed the acquisition from Lloyds Bank of Scottish Widows Investment Partners, becoming the largest independent fund manager in Europe, stewarding £324bn.  The performance of Lloyds Bank shares led the government to sell 8% to raise £4.2bn.  The markets witnessed a host of IPOs such as Pets at Home (valued at £1.2bn) and Poundland (valued at £750m), both of which were over-subscribed, which is an encouraging sign of investor sentiment.

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.