Mixed returns and a tale of two central banks
June saw mixed returns across asset classes. Russian equities rose a further 4%, while European markets fell by around 2–3%. In the US the S&P 500 continued to make record highs, although gains were diminished in sterling terms by the falling dollar. The FTSE 100 had a lacklustre month, falling by just over 1%. Beneath the headline numbers, the more significant story was one of diverging central bank signals: stimulus in Europe, tightening talk in the UK.
The ECB acts on deflation fears while Carney shifts on timing
The European Central Bank announced a package of measures aimed at stimulating growth and arresting the fall in consumer prices. These included cutting interest rates to record lows and providing cheaper long-term financing. The message from Frankfurt was clear: the eurozone recovery remains too fragile and too disinflationary to leave to its own devices.
In the UK, the Governor of the Bank of England warned that interest rates might rise earlier than the market was currently expecting. This was a notable shift in tone: the market had been expecting rates to start rising in the spring of 2015, as guided by the Governor himself just a month earlier. Bond yields in the UK rose slightly to reflect the change in interest rate expectations, while yields continued to fall across Europe following the ECB cut.
A five-year high for the pound brings mixed blessings
Sterling rose to a five-year high against the US dollar, boosted by further evidence of industrial growth. Whilst this is helping to keep the lid on inflation, it is making life harder for exporting businesses. It also means that some gains in overseas funds are lost in currency translation — a drag that is easy to overlook but meaningful over time.
The FTSE 100 index, heavily weighted towards international earners, felt the effect of both the stronger pound and a general lack of momentum. Shares failed to test recent highs during the month. Technical support sits around the 6,600 level, but in our view the greater risk lies in a more meaningful correction. We would look to use any such pullback as an opportunity to add to positions at lower levels.
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
The UK growth story looks the most convincing
We are happier to believe in the UK growth story than in most other economies. There is a greater consistency of economic data pointing towards an expanding economy with, as yet, few signs of inflationary pressures. We expect this momentum to build going into the general election next May.
In the US, we remain cautious on valuation levels. This is, however, the market hitting repeated new highs, and we will continue to remain invested for now. The tension between expensive valuations and strong price momentum is one we are watching closely.
In fixed interest, bond yields in our view still remain too low to compensate for the risk of capital loss. The demand for high-yield bonds continues, and this has led to a weakening of security offered on some new issues. For now this remains the most popular bond sector, but we are turning increasingly cautious. When the terms on offer start to deteriorate, it is usually a sign that the cycle is maturing.
We are happier to believe in the UK growth story than in most other economies
On our lower-risk portfolios we continue to prefer a blend of equity income, property and absolute return funds to fixed interest assets. In equities, we generally favour the defensive qualities of income funds over growth funds.
Rotating into property
During the month we increased our exposure to property across the funds, switching out of absolute return funds. We like the higher yield currently offered by property relative to both fixed interest and absolute return, and see value in broadening our income sources.
Emerging markets over developed
We continue to prefer the value available in emerging markets to that in developed markets, although we recognise that this differential has tightened over the past few months. We are monitoring this closely.
Gold as a long-term hold
Our gold funds had a strong month, gaining between 10–14%. This supported our view that gold has bottomed and remains a sensible long-term hold within portfolios positioned for a range of outcomes.
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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