Investment Comment May 2015

The General Election has dominated UK news in the last six weeks. In defiance of the pollsters’ predictions, the Conservatives won and the markets were delighted. Overnight, the pound jumped more than 1% against the USD and more than 2% against the euro. The Top UK 100 Companies was up more than 1.6% on the morning following the election.

However, the election result brings its own uncertainties. The Conservatives are likely to keep their promise of holding a referendum on EU membership. Although polls currently suggest the UK would vote to stay in, the referendum (likely to be held in 2017) represents a significant economic risk. The UK also faces constitutional challenges, including demands to reform the voting system and renewed calls for Scottish independence, which are likely to create some uncertainty.

In UK company news, Pace was subject to a takeover offer by Arris, a US-listed firm. The markets saw this deal positively, and the Pace share price rose significantly. HSBC surprised analysts with a 4% rise in Q1 profits; it also announced that it was once again considering relocating its headquarters to Hong Kong. Shell announced its intention to acquire BG Group but the deal must obtain regulatory approval.

UK Commercial property returns improved, with the difference in yield between property in London and in the rest of the country narrowing.

Following the introduction of the new UK pension freedoms, a rush of people accessing smaller pension pots had been expected. So far this has not been the case. Indeed, the increased freedom to pass pensions down a generation is leading many to leave pension funds alone and draw income from other assets.

In Europe, consumer confidence remained positive, and near recent highs: a good indicator of recovery. However, in Greece, 100 days into Syriza’s term of office, tensions remain high over their position in the Eurozone. There is no clear way in which Syriza can satisfy the creditor nations whilst honouring its promise to the Greek electorate. As a result, there is increasing talk of a further election in which Syriza would look to confirm the support of the Greek people for its negotiating position. Such concerns contributed to a weaker month for European equities, with the  Eurofirst 300 down 0.24%.

At the start of May, European bond yields spiked higher. This sudden move was ascribed to an overcrowded trade: too many investors expected yields to fall due to European QE, and they had to scramble to exit their positions once yields moved higher.

In the US, both GDP growth and inflation were subdued in the first quarter. This prompted the FOMC to keep rates low in a unanimous decision at their meeting at the end of April. They affirmed that even when inflation and unemployment return to normal levels it may be necessary to keep rates low for some time. Janet Yellen, chair of the FOMC, also commented that she believes US stock market valuations ‘generally are quite high’. The Bank of England is also expected to delay raising rates in response to softer data from the start of this year.

In the Far East, Chinese growth slowed, believed to be a result of new anti-corruption regulations impacting the luxury goods market. In Japan, CPI rose above 0% once again and unemployment fell.

Despite the uncertainties, we continue to believe that a well-diversified portfolio will deliver positive returns. Indeed, the increased volatility should result in good buying opportunities.

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.