Investment Comment August 2015

July was a volatile month in the markets. In the middle of the month, there was concern as we saw drops in many major markets. However, across developed markets the month has actually been positive: the Top UK 100 Companies is up 2.69%, the S&P 500 is up 1.97% and the Nikkei 225 is up 1.73%. Volatility can provide buying opportunities, and also serves as a reminder that equities should be seen as a long term investment.

In the UK, the Bank of England followed the Federal Reserve’s lead by indicating that interest rates may soon begin to rise. Mark Carney, the Governor of the Bank of England, said that rates could begin to rise around the turn of the year. He added that when interest rates do rise, they will do so gradually and, in the Bank of England’s current view, peak at a relatively low level of about 2%, which is approximately half the long term average rate. Rising rates are likely to be good for savers as the return they receive is likely to follow the Bank of England rate. Previously, worries were expressed that homeowners, already overstretched on mortgage repayments, would suffer if rates rose, leading to more mortgage defaults; however, Carney stated that he believes homeowners are now in a much more robust position and will be able to accommodate gradual rate increases. When rate rises do come, though, they are likely to be bad for bonds, as the price of bonds usually falls when rates rise. Early in July, the Chancellor announced his new budget, and our summary can be read here.

Mergers and acquisitions activity (often considered indicative of the health of the economy) remained strong in July. Chime Communications was the subject of a £374m takeover offer by WPP and Providence Equity Partners. HellermanTyton was acquired for £1.1bn by US firm Delphi Automotive, a firm which is looking to capitalise on increasing demand for ‘smart’ vehicles. Zurich also announced it was considering offering £5.5bn for RSA: although RSA has advised shareholders to take no action yet, the potential offer can be seen as a vote of confidence in RSA, which is 18 months into a turnaround under chief executive Stephen Hester.

In Europe, calm returned after several months of escalating tension over the Greek crisis. While Greece saw market turmoil as the stock exchange reopened, it should be remembered that Greece makes up only a small portion of Eurozone GDP and that confidence is returning to Europe now that the immediate crisis is resolved. Further, Europe’s loose monetary policy will continue to have advantages, especially in contrast to the imminent tightening of monetary policy in the US.

In the US, the trend of good nonfarm payroll figures continued. Especially following the Federal Reserve’s announcement that it is now looking to raise rates before the end of the year there is a great deal of focus on the August nonfarm payroll figures, with commentators speculating that a good figure (generally believed to be above 200,000) will confirm the Federal Reserve’s view of the economy and potentially bring forward rate rises. Other economic data was also good: the Chicago PMI (a widely-watched gauge of economic activity) increased over 5 points in July, rising to 54.7 from 49.4 in June.

While China continued to experience some stock market woes, as the market initially continued its fall, the Chinese government now seems to have arrested the decline with a series of measures ranging from a ban on short selling to instructing government owned financial institutions to buy large quantities of shares. Although this intervention is bad news for those hoping China would liberalise its stock market, it has stabilized the downturn and should prevent panic spreading to other stock markets. Elsewhere in the Far East, despite large amounts of quantitative easing, the Bank of Japan has still not reached its 2% inflation target, with inflation at 0% in June. Officials believe that falling energy prices are dragging down the inflation figure and so are considering switching to an alternative inflation measure which strips out energy prices.

In summary, despite some volatility in the middle of the month, the outlook for the global economy, and for equity markets is generally positive. Rate rises are now looking increasingly likely and will change the investing environment, but if equities are viewed as a long term investment we expect them to continue to provide a good return.

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.