Investment View June/July 2015
The month has been dominated by two concerns that remain unresolved. As constantly stated, markets hate uncertainty and right now there is lots of uncertainty around. Over the month the FTSE 100 Index has declined to its lowest level since January and dropped to around 6650 from over 7,000 just a few weeks ago. Stocks have been depressed by a lack of progress in Greece's debt talks, which continues to unsettle investors. As I write, there is some optimism that a last gasp solution can be negotiated and UK and European markets have responded very positively with the FTSE close to 6,800. A quote from the Financial Times states “The prospects for a deal on Greece today have improved following a new plan presented by the Greek government, which makes some concessions. It has received positive responses from the French government as well as the European Commission.” The other issue that continues to trouble markets is the rise in US interest rates. Fed Chair Janet Yellen pushes us towards - 'Forget about the date of the next rate rise, focus on it being very very gradual'. Rates aren't going to rise any time soon seems to be the message but markets are unsettled and nervy.
The summer is frequently a jittery and volatile time in markets with historically lower trading volumes exacerbating the impact of global uncertainty. This is set against a backdrop of many investors believing that markets are in a bubble and a correction is inevitable. The saying “sell in May and go away to St Leger day (early/mid-September)” is not without some foundation, but then again the saying developed over a time when interest rates were not virtually at zero.
Both of the issues causing the greatest uncertainty are well known to markets but what is not known is the impact the outcomes may have. Interest rates will rise in the US, quantitative easing is over so what will be the result? No one can be certain as it has never happened before so the impact can only be guessed. Countries have gone bankrupt before and failed to pay their creditors but we have never had a member of the Eurozone and a currency union member fail. What will be the consequences both short term and long term? Will other countries contemplate an exit? Will there be contagion? No one has the answers and that gives rise to the uncertainty that troubles markets. A solution to allow the currency union, flawed or not, and the Eurozone to remain intact is the preferred option for most investors and us (and Governments) but a solution rather than a sticking plaster is what markets want. This issue troubled markets just under 4 years ago and we need a proper long term plan to avoid a further repeat of this saga. It is perhaps naïve to believe this as politicians want a fix now and worry about the future later- kicking the can down the street. European politicians are good at the can kicking.
For the longer term investor, which we are, we acknowledge that it is unsettling and has an impact on portfolios but it does provide our fund managers with opportunities. At times like this markets behave as one. Good and bad companies get marked down as the wave of uncertainty washes across all quoted companies indiscriminately. This provides managers to buy or top up their holdings in good companies at better value and has a long term beneficial impact. We have seen the benefit of such an impact many times and so remain sanguine about these events which will take time to play out but will be resolved. The overall global economy has not changed due to Greece and nor will it. We are living in a slow growth economy and that is the likely picture we face for the foreseeable future. Failure to find a solution will raise many questions about the future of Europe but good companies will not suddenly become bad. We will continue to watch the situation closely. I have not met a fund manager who is overly concerned by the Greek situation. I do not believe that is in any way complacent but reflects the reality of the situation.
Our view of asset classes has not altered over the period. Bonds and fixed income generally, as discussed in the previous Investment View, remain challenging but continue to have their place in portfolios. Unsurprisingly as equity markets came under pressure due to the uncertainties there has been some flow into bonds from equities. As investors’ risk appetite builds on the hope of a solution exposure will again be trimmed from perceived safe havens of Treasuries and Bunds. Exposure will increase if a solution is not found.
Property continues to be robust and the asset class seemingly unaffected by the uncertainties surrounding markets. Over the last month increases of around 1% have been achieved by the property funds we support. Annually, they have grown by between 11% and 16% over the last 3 years, and as the chart shows, the performance is strong. Sentiment and data remains very positive for this asset class over the next two or three years at least. From being a pariah in many portfolios it has once again found favour with many long term investors and it is a feature of almost all of our portfolios.
There has been little change over the period in the global economic backdrop that companies compete in. Economic data remains fairly positive but not scintillating. Our view is that 2015 will not be a sparkling vintage for the US or UK markets but some respectable progress should be possible. Overall, income will continue to be a major component of true value growth and we will continue to seek out good income opportunities both from UK and global funds.
Most houses agree that Europe and Japan provide the greatest value and opportunity. We have been supporters of Europe for a while, which has been rewarded. Exposure to Japan has been limited to holdings held by global equity and global equity income funds. For some time we have been considering whether we should gently increase exposure to the Japanese market and due diligence is underway. Japan has had a few false dawns but the economy now seems to be moving in the right direction with strong leadership and a supportive central bank.
The next few days will see a resolution of the Greek problem one way or another. It is very hard to call but it feels like there is a desire on both sides to find a solution but not be seen to capitulate. We hope sense prevails and Greece can remain part of the Euro but if a solution can’t be found it will be an uncomfortable summer for many markets until clarity is apparent. Uncomfortable but an opportunity for fund managers to buy at depressed prices.