Expert commentary on the world’s financial markets to guide your investments.
Investors continued to flock to safe havens at the beginning of February as the oil price fell to a new low. Investors took this as a negative signal for global growth and risk assets underperformed as a result. However, mid-way through the month, Saudi Arabia and Russia finally came to an agreement about oil production and seemed aligned on freezing output at current levels. An actual cut would be more meaningful in terms of global oversupply, but this development was enough for investor sentiment to turn around by the end of the month. Overall, high quality sovereigns performed well as volatility and growth fears pushed expectations for interest rate hikes back further. UK Gilts and US Treasuries returned 1.4% and 1.0% respectively, whilst Investment Grade bonds and High Yield bonds delivered 0.6% and 0.7%. In a turn of fortunes, Emerging Market debt performed best with a return of 1.5% due to the oil price stabilisation.
Key Themes: Normalising US and UK monetary policy to increase bond volatility.
Our View: Focus on corporate and high yield bonds. Gilts still look expensive.
UK equities outperformed last month with an overall return of 0.8%. This was driven by the risk-on rally from mining and energy-related companies (which make up a major part of the FTSE 100). The more domestically-focussed smaller companies delivered 0.4% despite ‘Brexit’ fears returning to the fore. After securing considerable concessions in an EU reform deal, the Prime Minister officially set a date for the in/out referendum of 23rdJune 2016. However, the final text was not enough to persuade key cabinet members or the Mayor of London who remained in favour of leaving the EU. Heightened uncertainty has weighed on the Pound. Although exporting companies are generally in favour of remaining in the EU, the more competitive currency is helpful in the meantime.
Key Themes: Strong consumer sentiment against a backdrop of low inflation and increasing wages. UK interest rate rises to be limited and gradual.
Our View: Positive on UK equities, especially those ‘close to the consumer’.
US equities retreated in the first half of February but rebounded in the second half (in line with other markets). The market was almost back at par by the end of the month. Investors were mainly concerned about the global outlook but domestic data itself painted a mixed picture for US equities. Manufacturing activity was shown to be contracting and activity was also slowing in the services sector. Other figures painted a more optimistic picture, supporting the wide-spread equity rally at the end of the month. The jobs market continued to improve and, growth and inflation data were better than expected. These more positive points keep further US interest rate increases on the cards this year, but greater market volatility has seemingly lowered the probability. US smaller companies finished flat on the month whilst larger companies lost 0.2%.
Key Themes: US interest rate rises to remain gradual.
Our View: Favour US smaller companies in anticipation of further earnings improvement and help from the strong currency.
Last month, data showed that the Eurozone grew 0.3% in the final quarter of 2015. Pleasingly, Spain (one of the periphery countries) led the way. The economic recovery appeared to be on track but inflation turned negative again and prompted greater speculation that the European Central Bank would have to deliver further monetary stimulus soon. The slow pace of structural reform and current weakness in commodities remain major obstacles to reaching the 2% inflation target. Only the industrial and basic resources sectors meaningfully participated in the eventual risk-rally last month. Banking stocks underperformed as investors fretted about what negative interest rates from the European Central Bank (ECB) would mean for profitability and lending. Overall, European stocks lost 3.1%.
Key Themes: Extensive monetary stimulus from European Central Bank.
Our View: Favour large exporters that can benefit from a competitive Euro.
Asia Pacific/Emerging Markets
Last summer and at the start of this year, commodity-related sectors and countries have taken the brunt of global slowdown concerns. In February though, these areas of the market bounced back, supporting outperformance of Emerging Markets over Developed Markets. They finished up a modest 0.1% but, by contrast, Developed Markets lost 1.5%. Expectations for more stimulus in China supported the risk-on environment which drove equity returns in the second half of last month. Chinese stocks themselves underperformed but Asia ex Japan held up well with an overall loss of 0.5%. Despite being held back by deep structural problems in the country, Brazilian stocks returned 5.2% with miners and steel producers leading the way. Russian stocks, with significant oil exposure, returned 1.6%.
Key Themes: Potential capital outflows from Emerging Markets when US raises interest rates. Deep structural problems in Brazil. China’s reform agenda.
Our View: Focus on companies with sustainable earnings. Bias towards holdings that will benefit from the Chinese reform story and away from Latin America.
The Yen’s haven status has been a significant complication in Prime Minister Abe’s strategy to reflate the economy. The move to negative interest rates in January was intended to devalue the currency and support the move to normal inflation. With investors flocking to the Yen for safety during the turbulent start to this year, the currency has strengthened considerably though. Japanese exporters have been hardest hit by this with the sharp knock to competitiveness. Banking stocks were also seen to be less profitable due to the negative interest rate policy. Domestically speaking, economic data was shaky at best. Retail sales were weak and the economy contracted by 0.4% in the final quarter. However, the key manufacturing sector appeared to be on track and policy makers indicated that the planned consumption tax increase next year could be delayed in response to additional weakness. Despite recovering towards the end of the month, the Japanese stock market finished February with a 9.3% loss.
Key Themes: Prime Minister Abe’s Three Arrows strategy for Japanese growth.
Our View: Positive on industries that will benefit from domestic growth-oriented reforms such as e-commerce, services to an ageing population and healthcare demand.
Anderson Strathern Asset Management Limited is a boutique asset management firm that offers independent and whole of market advice to the corporate and private sector relating to financial planning, investment management, pensions and general insurance. For further information or assistance, please contact Alec Stewart or your usual contact at ASAM.
This information is obtained from sources considered to be reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitutes financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance.