Whitechurch Asset Views - August 2017
Stocks are jumping and the market is high (to paraphrase Ella Fitzgerald’s seasonal classic). After a slight blip in June, July saw investors shake off concerns over the potential for Central Bank tightening and global stockmarkets reverted to a sunny climate of positive returns and low volatility. The UK and most developed overseas markets posted steady gains, whilst Asia and Emerging Markets were the brightest spots, with some exceptional returns.
As markets have risen, a key characteristic this year has been the distinct lack of volatility. This has particularly been the case in the United States and as the US stockmarket hit new heights in July, the VIX index (known as the fear index, measuring the level of fluctuations of US shares) fell to it’s lowest ever of 8.8. Given that the summer can traditionally see elevated price fluctuations due to lower trading volumes, it certainly does appear that there is complacency from equity investors compared to other asset classes.
Whilst equity markets have been rising in tandem, currency movements have diverged and this has skewed returns for UK investors. The Euro continues to rally on improving economic data on the Continent and this enhanced returns for UK investors with European exposure. In contrast, over the past month and year to date we have seen the ongoing weakness of the dollar amid increasing scepticism over the implementation of President Trump’s pro-growth policies. The stabilisatiion of the pound and weakening greenback has seen a US stockmarket return of 11.2% so far this year translate to just 4.2% in sterling.
Beneficiaries from the weakening dollar have been Asian and Emerging Markets. There are many positives for these markets at the moment. As well as the US dollar remaining relatively weak, the lack of inflation is putting a lid on any potential interest rate rise, Chinese growth remains robust and commodity prices have had a bounce back. Although, there appears to be a good level of momentum in the near-term, sabre rattling (or worse) in North Korea has the potential to disrupt appetite for risk.
Closer to home, the UK stockmarket ended the month higher with medium and smaller companies returning to favour, as the domestic economy has proved relatively robust despite the political uncertainty. More cyclical sectors proved stronger last month, with mining stocks at the forefront. However, many more defensive equity income funds were dragged down by negative news-flow within the Tobacco and Pharmaceutical sectors.
Bonds also returned to favour over the last month. Economic releases encouraged investors that the Goldilocks environment of steady growth accompanied by a lack of inflationary pressure would prove supportive for the asset class, reducing pressure for rising interest rates. However, the strong performance of bond markets continues to raise questions over valuations. We continue to see more opportunities in corporate than Government bond markets, but the yield differential between corporate and Government bonds is now lower than it has been since the global financial crisis so it is important to be selective!
One area where we have started to see more value is UK commercial property. Having exited the asset class last summer due to concerns over valuations, the effect of the Brexit vote and the effect of investment flows on liquidity, we are now more sanguine. The yields offered by the asset class appear attractive relative to bonds, whilst the UK economy has not fallen off a cliff and overseas buyers continue to support demand. As a result we have added a modest weighting to cautious and balanced mandates.
This recent move back into property is endemic of our view that with cash continuing to provide a negative real return, there are opportunities across asset classes that can provide more attractive long-term growth prospects and more attractive yields. A well-diversified portfolio can provide many opportunities to exceed miserly cash returns for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.