New highs, then a sharp reminder from Crimea
Stockmarket volatility continued through February, but the direction of travel remained upward. The S&P 500 reached a new all-time high and the FTSE closed at its highest level since the credit crunch, before escalating tensions in Ukraine sent equities sharply lower. Share prices subsequently recovered most of their losses as President Putin pressed the pause button, ordering troops to pull back from the borders. It was a month in which domestic fundamentals pointed firmly in the right direction, yet geopolitical risk proved it can reassert itself at any moment.
Carney signals patience, and the data backs him up
Presenting the Bank of England's Quarterly Inflation Report, Governor Mark Carney was emphatic that the Monetary Policy Committee is in no rush to raise interest rates. Spring 2015 now appears the likely starting point, and even then the pace of rises would be slow, with the eventual peak considerably lower than on previous occasions.
The case for patience was supported by UK inflation falling to 1.9%, its lowest reading since November 2009. House prices continued to push ahead, but with the broader inflation picture benign, there is little immediate pressure on the Bank to act. For now, the UK economy looks to be in good shape and appears less vulnerable than most other developed economies.
Mixed signals from the US and a sharp test of nerve from Ukraine
Across the Atlantic, economic data has been more mixed and several companies failed to match their earnings forecasts. The S&P 500 nonetheless managed a new all-time high before month-end turbulence took the edge off gains. We are a touch more cautious on the US than on the UK at present.
The principal source of that turbulence was Ukraine. Escalating tensions sent equities sharply lower, before prices recovered most of their losses as Russia pulled back from the borders. The episode was a useful reminder that at elevated valuations, sentiment can shift rapidly on events that few had priced in.
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
Corrections will come, and we intend to use them
We expect further stockmarket corrections over the course of the year and will look to use a more meaningful sell-off as a buying opportunity. The UK economy looks to be in good shape and for now appears less vulnerable than most other developed economies, though we are a touch more cautious on the United States where the data has been less convincing and some earnings have disappointed.
Bond yields rose marginally in February but in our view still remain too low to compensate for the risk of capital loss. We continue to believe that property currently offers better returns for a similar level of risk. Technical indicators suggest that we may have seen the worst of the fall in gold prices, with the price action starting to look more constructive.
We still believe there is more mileage in Japanese and Asian equities, and emerging markets continue to offer good value going forward. Our small weighting in gold and commodities has continued to serve us well during this more recent spate of volatility.
We expect further corrections over the course of the year and will look to use a more meaningful sell-off as a buying opportunity.
On our lower-risk portfolios we continue to prefer a blend of equity income, property and absolute return funds to fixed interest assets. We made several adjustments during the month to improve positioning across risk profiles.
Reducing equity exposure into strength
We took advantage of the rally in UK shares to further reduce our exposure to equities, switching into the less volatile Insight Absolute Return fund. With markets at post-crisis highs, we see merit in locking in some gains while maintaining upside through our remaining equity positions.
Adding to UK commercial property
During the month we increased our exposure to the Standard Life UK Property fund, which is looking to benefit from demand for commercial property expanding beyond the South-East. We believe property continues to offer better risk-adjusted returns than bonds at current yield levels.
Maintaining conviction in Asia and gold
We still believe there is more mileage in Japanese and Asian equities, and emerging markets continue to offer good value. Our small weighting in gold and commodities has continued to serve us well during this more recent spate of volatility, and the price action is starting to look more positive.
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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