The end of moving in lockstep
It is no longer simply a case of saying that stockmarkets rose or fell in unison. Although overall volatility fell compared to recent months, the correlation across equity markets broke down in spectacular fashion. The S&P 500 briefly hit a new high before ending nearly a per cent lower; Asian stocks rose by nearly one per cent but Japan dropped almost four per cent; and in Europe, France rallied 1.6% while Germany, more sensitive to events in Ukraine, fell by 0.3%. Beneath the surface, a rotation out of last year's winners into more defensive large-cap shares added a further layer of divergence.
Large caps hold firm while growth darlings stumble
In the UK the FTSE 100 rose by 3%, but the FTSE 250 mid-cap index fell by 2.35% as some investors took profits, rotating out of last year's winners into the more defensive large-cap shares. The divergence between the two indices was striking and underlined the extent to which sentiment had shifted within the domestic market.
Elsewhere, the pain was concentrated in the sectors that had led the rally. Biotech shares dropped a further 5%, taking the cumulative decline to 20% from January's peak, and technology stocks collapsed by 11%. These moves served as a reminder that momentum can reverse sharply when valuations are stretched.
The IMF backs Britain while the US stumbles
George Osborne's smug look remained firmly in place. Inflation and unemployment in the UK fell, and the IMF upgraded its growth forecast for 2014 to 2.9%, stating that the UK economy was likely to grow at a faster pace than the US, Germany and Japan. The Chancellor will do his utmost to ensure a period of strong growth ahead of the 2015 general election.
A plethora of improving growth data in the eurozone included business activity growing at its fastest rate in nearly three years. In stark contrast, the United States saw a shocking first-quarter GDP estimate of just 0.1%, a figure that wrong-footed even the most cautious of forecasters.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Bonds offer too little for the risk they carry
The UK economy in particular looks to be in good shape, and the Chancellor will do his utmost to sustain this momentum into 2015. The FTSE 100 appears to be trading within a tighter 6500–6850 range; our view is that although the trend is rising, the greater risk lies in a more meaningful correction. We would look to use any such opportunity to buy shares at the lower levels.
We remain cautious on valuation levels in the US, but this is the market hitting new highs, so we will continue to remain invested for now. The demand for income has driven yields on ten-year peripheral government bonds such as Spain and Italy below 3%. This in turn is restricting any meaningful sell-off in UK bonds, which carry a higher credit rating and therefore should offer a lower yield. We continue to prefer the potential returns offered by property.
The demand for high-yield bonds continues, but we view these yields as insufficient to compensate for the amount of risk involved. For now this remains the most popular bond sector, yet we are turning increasingly cautious.
We view high-yield bond yields as insufficient to compensate for the amount of risk involved
On our lower-risk portfolios we continue to prefer a blend of equity income, property and absolute return funds to fixed interest assets. Emerging markets were the best performers across our higher-risk portfolios and continue to offer good value going forward.
Reducing volatility on lower-risk portfolios
During the month we slightly reduced our absolute return position by switching 5% from the Standard Life Global Absolute Return Strategies fund into a blend of the TwentyFour Dynamic Bond and the M&G Inflation-Linked Corporate Bond funds. Both offer some protection against a rise in bond yields whilst lowering overall portfolio volatility.
Mid-cap headwinds for top performers
Some of our top equity funds, including the Standard Life UK Equity Unconstrained fund and the Marlborough Special Situations fund, suffered from the fall in mid-cap stocks. We remain comfortable with these holdings and view the rotation as a short-term headwind rather than a change in the underlying investment case.
Gold, commodities and emerging markets
Emerging markets are attracting more interest and continue to offer good value; these funds were the best performers across our higher-risk portfolios. We also remain happy with our small holding in gold and commodity stocks.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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