A positive month across the board
May delivered positive returns across asset classes, ranging from 1% on UK fixed interest bonds to nearly 5% on Japanese equities. The more dramatic performance came from a 12% rise in the Russian market as tensions with the West eased. In the UK, the FTSE 100 brushed a post-credit-crunch high before consolidating in a higher range, while bond yields continued to fall on deflation fears in Europe and rebalancing by US pension funds.
A bullish consolidation as the Bank preaches patience
The FTSE 100 hit a post-credit-crunch high during the month, falling just short of the 6,900 figure. Although it failed to hold at the peak, the index spent May in a higher 6,800–6,900 range, which could reasonably be interpreted as a bullish consolidation.
The Bank of England used its Quarterly Inflation Report to emphasise that although it was encouraged by improvements in the British economy, it was in no rush to raise interest rates and that when it did so the ceiling was likely to be lower than on previous occasions. The broader picture remains encouraging: independent growth forecasts are being revised higher, and both unemployment and inflation continue to fall. Chancellor George Osborne will do his utmost to ensure a period of strong growth ahead of the 2015 general election.
Meanwhile, the Office for National Statistics faces a credibility test of a different kind. In a somewhat desperate attempt to boost reported growth across Europe, member states must now include income received from prostitution and the illegal sale of drugs in their GDP figures. Even by Eurostat standards, this feels a touch unfair on the statisticians.
New highs in the US despite worrying undercurrents
The US market continues to make regular new highs, but it does so in the face of some worrying data: GDP for the first quarter of 2014 was negative, and the continued withdrawal of monetary stimulus through the tapering of quantitative easing removes a significant tailwind. Meanwhile the German DAX reached a new high of its own, though the logic is rather more perverse — European economic data is so dire that the ECB is now introducing negative deposit rates, and markets are rallying on the prospect of further stimulus.
Bond yields continued to fall during the month, driven by a fear of deflation in Europe and by US pension funds taking profits on equities and switching into long-dated bonds. The demand for high-yield bonds remains strong, but this has led to a weakening of the security offered on some new issues — a development we are watching closely.
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 as a saner refuge in an uncertain world
We view the UK as a slightly saner refuge in an insane world. The economy continues to improve, growth forecasts are being revised higher, and both unemployment and inflation are falling. By contrast, the US market makes repeated new highs in the face of negative first-quarter GDP and the withdrawal of quantitative easing, while European equities rally not on good news but on the expectation that conditions are bad enough to force further central bank intervention.
Our view on the FTSE 100 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 lower levels. We remain cautious on valuation levels in the US, but this is a market hitting repeated new highs and we will continue to remain invested for now.
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, but it has led to a weakening of the security offered on some new issues. For now this remains the most popular bond sector, but we are turning increasingly cautious.
We view the UK as a slightly saner refuge in an insane world
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.
Increasing property exposure
We are increasing our exposure to property across the funds, switching out of an absolute return fund. We like the higher yield currently offered by property relative to fixed interest and absolute return funds, and see it as a more attractive source of income at this stage of the cycle.
Emerging markets over developed
We continue to prefer the value in emerging markets to developed markets, although we recognise that this differential has tightened over the past few months. We are monitoring the gap closely.
Holding gold for the long term
Gold funds had a poor month, falling by around 4%, but we still believe that gold has bottomed and represents a sensible long-term hold within diversified portfolios.
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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