Investment Comment September 2015

The market volatility caused by the so-called ‘Great Fall of China’ has grabbed attention during August and we issued a separate note on Monday 24 August in relation thereto. In summary, the market in China had experienced rapid rises: in the 12 months to its peak, it rose in value by 150%. Therefore the fall in value, whilst significant, was not cataclysmic. Further, the fall did not cause changes in the underlying fundamentals of western companies justifying the falls seen in other global markets, leading the global correction to be seen as a buying opportunity. The week since the first dramatic headlines has vindicated this view: comparing the Friday close and the Tuesday open from that week, the Top UK 100 Companies was up 4.01%, the S&P500 was up 1.95% and the Nikkei 225 was up 7.47%. Volatility, however, looks likely to linger and the markets will remain sensitive to Chinese data. At the start of September, markets headed down following a below expectations read on the Chinese PMI: a figure which normally passes almost unnoticed.

In the UK, Mark Carney, Governor of the Bank of England, confirmed that the Bank is still looking to raise rates relatively soon. It is now believed that the first UK rate hike will be in early 2016. In UK company news, KPMG found in a survey at the start of August that UK companies were more enthusiastic than their foreign counterparts to undertake mergers and acquisitions; the same report suggested that rising forward P/E ratios indicated investor confidence in the ability of companies to carry out such mergers. London-listed building materials company CRH purchased an American window glazing company for £843m. The betting companies Paddy Power and Betfair announced their intention to merge: a move which will create one of the world’s largest betting groups. Royal Dutch Shell announced a bid for BG Group which was well-received by the market, with analysts upgrading their views on both companies following the news. The details of the WPP bid for Chime were finalised, with Chime shareholders voting on the acquisition in mid-September.

In the Eurozone, there were continuing concerns over financial stability. The French economy minister, Emmanuel Macron, put forward detailed proposals for a full fiscal union of the Eurozone. The French government believes that such a move would prevent a recurrence of the Greek crisis. However, this proposal is likely to be highly controversial in many European countries, including Germany. In Eastern Europe, Ukraine reached a deal to restructure its debt with most of its creditors. However Russia, possibly driven by political as much as financial concerns, declined to take part in the deal.

At the start of August, investors in US markets were preparing themselves for a likely interest rate increase in September. However, following the Chinese volatility even some hawkish members of the FOMC (the US rate-setting committee) have indicated such a move is less likely. The nonfarm payrolls data released in August was slightly below consensus, but still above the 200k mark which is widely perceived to indicate a growing economy.

The Japanese economy contracted slightly (-0.4%) in the second quarter. This was a smaller contraction than the expected -0.5%. The economy is expected to rebound in Q3 and grow 0.7%. Affected by the ongoing low commodity prices, Japanese inflation also dipped, although it remained positive at 0.2%. Inflation excluding energy and food, which the Bank of Japan had said in July would be the most appropriate measure to look at, held steady at 0.6%. The BoJ is fighting to keep headline inflation positive in order to avoid deflation becoming a self-fulfilling prophecy if it is perceived they have failed; maintaining confidence in their policy is especially important as Prime Minister Abe, the architect of Abenomics, is currently being attacked for some of his other policies, which are viewed as controversial. So far, the BoJ seems to have succeeded.

August was a rocky month for investors. However, properly diversified portfolios have so far come through the volatility substantially sheltered. By taking reliable advice you can ensure that, going forward, you have the best opportunity of conserving and growing your assets.

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.