Investment Comment January 2016

In the UK, the Autumn Statement saw the government continue attempts to curb burgeoning numbers of buy-to-let landlords.  A 3% increase in stamp duty on buy-to-let homes was added to earlier changes to second mortgage tax relief. The announcement by the Chancellor to build 400,000 new homes by 2020 proved a boon to house builders, who enjoyed a very positive quarter. We expect to see more moderate house price growth as the market adjusts.

The Chancellor’s optimistic sentiments jarred with the downgrade of GDP growth in the third quarter from 0.5% to 0.4%. Yet, an unexpected Black Friday surge allowed many retailers to benefit from growing consumer spending power.  The impact of the December flooding has yet to be fully realised, with latest estimates of the damage exceeding £5bn.

The Top UK 100 Companies endured a volatile but positive quarter. Falling commodities, including a seven-year low for oil prices, have continued to hamper elements of the Top UK 100 Companies. A brief fall to a three-year low was offset by a late rally, leaving the top-tier companies up 3.0% in the quarter. The Top UK 250 Companies remained more resilient, reflecting lower exposure to commodities and emerging markets, finishing up 4.5%.  However, in early January, jitters from China have reversed some of these gains.

M&A activity across the UK rose by 10.3% to £433bn for the year, reaching the highest level since 2007. Globally, Pfizer acquired Allergan for $160bn in a tax inversion deal that attracted some political criticism, and left the combined entity the largest pharmaceutical company by revenue in the world, boasting $60bn annual turnover. In the UK, BT obtained initial regulatory approval for the £12.5bn takeover of EE, the UK’s largest mobile network, despite opposition from rivals in the sector.

In North America, the Federal Reserve’s rate-setting committee approved the first interest rate rise since 2006, signalling the long-anticipated start of plans to raise rates throughout 2016. The dollar continued to strengthen in the quarter on the back of this. Unemployment and GDP data indicate a strengthening environment, and we remain positive about the outlook for US equities.

There was mixed news from the Eurozone.  Mario Draghi reiterated his commitment to quantitative easing in a December speech, pledging to continue the €60bn monthly bond-buying programme in an attempt to bring up Eurozone inflation to the targeted 2%. Inflation remains stubbornly low at 0.2%, dragged down by deflation in energy prices. However, lower energy prices are hoped to give greater spending power to European consumers. Political turmoil from inconclusive Spanish elections has not had a strong effect on the Eurozone as a whole.  Manufacturing saw PMI growth in a number of Eurozone members, including Germany, Italy and Greece, leading to the highest Eurozone manufacturing growth in 20 months. We therefore remain optimistic about selective opportunities in European equities.

Japan‘s technical recession in Q3 was revised to an annualised growth of 1%. Furthermore, November inflation figures saw a 0.3% year on year rise in overall prices, rising to 0.9% when excluding food and energy. However, some analysts noted that it may reflect one-off effects of a weaker yen. Prime Minister Abe reiterated the success of the economic stimulus packages, aiming for 2% inflation by the middle of fiscal year 2016. Japan has finished the year as the strongest performing equity region, and with unemployment at a twenty year low there are causes for a positive outlook.

Emerging Markets had a volatile and mixed quarter. The fall in commodities and oil prices have benefited some emerging market countries, but have significantly harmed larger countries such as Brazil, Russia and Venezuela. The oil prices are not expected to rise substantially in the near future, with continued Saudi Arabian refusal to slow production ahead of expected outflows from Iran following July’s changes to sanctions. Brazil and Russia have endured difficult quarters, with political difficulties and economic contractions affecting both. There is likely to continue to be longer-term weakness in these economies, with Russia particularly vulnerable to the oil price slump.  China’s fluctuating year ended on a higher note, with the Shanghai Composite index enjoying a 16% rise in the quarter despite trepidation over the underlying growth figures. Disappointing PMI figures did cause substantial falls subsequent to the new year as selling investors repeatedly forced the exchange to cease trading. We expect continued volatility in Asia as the extent of the Chinese slowdown becomes apparent. Nonetheless, we believe that opportunities do remain in the sector in the longer term, with underlying growth still expected.

With uncertainty over timescales for interest rate rises in the UK still clouding the future, fixed interest remains hard to predict as a sector with yields remaining low. Weaker than expected UK growth might delay rate rises to the latter part of 2016 or beyond.

The fall in the commodities sector may not yet be finished – concerns over the performance of China and a supply glut are still playing out. However, with the cyclical nature of the sector, there may be value in the medium to long term, in particular in those commodities less affected by oversupply, such as lithium.

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.