Investment Comment September 2014

Markets remained resilient over the month of August, as global equities delivered positive returns despite continued geopolitical tensions and poor European economic data.

Although European equities produced positive returns over the month, the region’s GDP growth stagnated in the second quarter (Q2), with the German and Italian economies both contracting. Spanish data was more upbeat, recording growth of 0.6% in Q2. The European Central Bank (ECB) responded to the figures, surprising the markets in early September, by cutting Eurozone interest rates by 10 basis points to record lows of 0.05%, as well as slashing overnight deposit rates to -0.2%.  ECB president Mario Draghi also announced a programme to buy asset-backed securities and covered bonds, with the intention of finally stimulating the Eurozone and combatting deflation. The EuroStoxx 50 declined to almost 3,000 in August but has since recovered 10%.

In contrast to this, the US and UK have seen strong economic results. US equities hit all-time highs as the S&P 500 broke 2,000. Similarly, the Top UK 100 Companies passed 6,900 for the first time in 14 years. Such impressive results have led the markets to price in a 0.25% raise in UK interest rates by the end of Q1 2015, and 0.5% by the end of Q2 2015.

The Scottish referendum looms ever closer. With the most recent YouGov poll placing the ‘Yes’ vote ahead in the race, markets are beginning to consider Scottish Independence as a more credible outcome. A recent report by Goldman Sachs highlights the negative impact a ‘Yes’ result could have. Indeed, we have already seen Sterling tumble against the Dollar off the back of the poll, and analysts forecast continued volatility in the run up to the vote on September 18. However, our position remains that independence is unlikely to occur, and that investors should resist any urges to predict macro events.  Ultimately, good companies will remain good companies and continue to produce strong returns.

In the bond markets, sovereign bond yields fell to new lows. Of key focus was Germany, where we saw negative bund yields, as the nation’s two-year debt fell to -0.072%. Yields on the benchmark 10-year debt also fell below 1%. Following the ECB’s announcement, the short-term government borrowing costs of five other nations: Ireland, France, Finland, Belgium and the Netherlands, also fell below zero.  In the US, President Barack Obama’s authorisation of air strikes in Iraq helped to push the 10-year US treasury yield from 2.56% to 2.34%.

In corporate news, Cambridge-based CSR revealed they rejected a takeover bid by US firm Microchip technology, causing shares to soar 35%. A new US court ruling concerning the 2010 Gulf of Mexico spill found BP ‘grossly negligent’, and BP will appeal the ruling and the fines of up to £11bn. Shares closed down nearly 6%, the worst one-day fall in 4 years. Chime Communications reported pre-tax profits were up 47% after benefiting from the FIFA World Cup in Brazil. The large amounts of cash on corporate balance sheets inevitably encourage M&A activity. Larger companies continue to need the growth and innovation provided by smaller companies, as was proven in the case of Kentz, whose shares were purchased by Canadian company SNC Lavalin this month.

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.