A volatile start to the year, as we predicted
In last month's commentary we noted that 2014 was likely to be another volatile year, with the main focus on how well the US and UK economies coped with further tapering of quantitative easing. January duly obliged: the FTSE traded a 450-point range, the US Fed announced a further $10bn cut in monthly QE stimulus, and the Dow fell 800 points from its high. We view January's pullback as a fairly normal correction following December's "Santa rally", bringing equities back to fair value.
Strong growth fears give way to the opposite concern
January's equity sell-off initially appeared to be driven by fears that strong growth would lead to monetary tightening sooner than expected. Unemployment rates in both the US and UK fell close to the targets set by their respective central banks for beginning to consider raising interest rates.
Over the following couple of weeks, however, the narrative shifted. Data across many major economies revealed a trend of falling inflation and more subdued growth, particularly in some emerging markets. What began as anxiety about overheating became concern that the growth story was not as robust as some had first thought.
The UK looks well placed, but US data gives pause
The UK economy in particular looks to be in good shape and for now appears less vulnerable than most other developed economies. We continue to view the domestic outlook with cautious optimism.
We are somewhat more cautious on the United States, where the economic data has been more mixed and a number of companies failed to match their earnings forecasts. Bond yields fell during January and in our view remain too low to compensate for the risk of capital loss; we continue to believe that property currently offers better returns than fixed interest.
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
A correction, not a crisis — and buying opportunities may follow
We view January's pullback as a fairly normal correction following what was a strong finish to 2013. Equities have returned to something closer to fair value, and if stockmarkets weaken further during February then we would view that as a buying opportunity rather than a reason for alarm.
The key question for the months ahead remains how well economies adjust to the gradual withdrawal of QE stimulus. Unemployment rates in the US and UK have fallen close to the thresholds at which their central banks have indicated they will begin to consider tightening policy, but with inflation falling across much of the world, there is no immediate pressure to act.
We still believe there is more mileage in Japanese and Asian equities, and that emerging markets continue to offer good value going forward despite the recent turbulence. Our small weighting in gold and commodities served us well during this more recent bout of volatility, providing a useful cushion.
When the facts change, I change my mind.
We continue to prefer a blend of equity income, property and absolute return funds over fixed interest. We used January's volatility to make several switches, trimming equity exposure and broadening our income holdings.
Lower-risk portfolios: reducing equity, adding absolute return
On our lower-risk portfolios we continue to prefer a blend of equity income, property and absolute return funds to fixed interest assets. We used the rally at the start of the year to slightly reduce our exposure to equities, switching into the Insight Absolute Return fund.
Adding UK commercial property exposure
We also switched into the Standard Life UK Property fund, which is looking to benefit from demand for commercial property expanding from the South-East.
Taking profits in biotech, broadening income
Across the balanced and higher-risk portfolios we remain invested in the main developed markets but with minimal exposure to Europe. We took profits on the AXA Framlington Biotech fund pending better buying opportunities.
A flexible approach to equity income
Following a positive meeting with the manager, we switched into the Standard Life UK Equity Income Unconstrained fund. This fund is run in a different style to our existing income funds, offering a more flexible approach across small, medium and blue-chip companies and placing a greater emphasis on future dividend growth.
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.
Make an enquiry →