Whitechurch Asset Views - July 2017
For UK investors all eyes were on the General Election in June, but despite the surprise result, markets took it in their stride. Of more interest to us, than the ongoing domestic political noise, has been the move of Central Banks over the month towards tightening monetary policy. In the US, the Federal Reserve raised interest rates for the third time since December. Whilst towards the end of June, Mark Carney signalled that UK interest rate rises were under consideration and Mario Draghi hinted Quantitative Easing stimulus may start to be withdrawn in Europe. However, Central Bankers have learnt their lesson in managing expectations, and although this saw a small sell-off in bonds and global shares, volatility has remained at low level.
The year so far
Halfway through the year and it has been a good six months for investors, with most areas making a positive return and investors prepared to take on risk, in an uncertain political and economic backdrop being rewarded.
In terms of unit trust sectors, China / Greater China has been the best place to be invested with the sector returning 17.5%. We have taken some profits on our Chinese exposure following the strong period of performance. More broadly Asian and Emerging Markets benchmarks have returned double-digit returns, ahead of Developed Markets. Europe has been the pick of the latter, and European smaller companies have particularly benefited from the improving economic environment and increased political stability on the Continent, with the sector returning 16.2%.
Currency movements have not provided the tailwind for UK investors with overseas funds that they did in 2016. Volatility of currency has reduced and sterling weakness has subsided. The pound has strengthened versus the dollar and the yen, whilst the euro has been robust and enhanced returns in Europe for sterling investors.
In the UK it has been a better environment for active managers. The return of 5.5% from the UK stockmarket has been exceeded by the average UK Growth and UK Equity income fund with these sectors returning 7.3% and 6.8% respectively. UK smaller companies funds have performed exceptionally well with the sector returning 14.3%. From a style perspective, following a brief rally at the end of 2016 for Value, it has been Growth stocks that have returned to favour so far this year.
Across other asset classes, returns from gold and Government bonds have been negligible, with the sell-off at the end of the six month period wiping out the returns of UK gilt funds. Corporate bond funds have been a better place to hold fixed interest exposure with credit risk rewarded. The IA Corporate and IA High Yield sectors were up by 2.9% and 3.9%. Akin to their equity markets, Emerging Market bonds have been a good place to be with the IA sector up by 4%, benefiting from a weakening dollar and strengthening economies.
After a turbulent period, following the referendum, calm has been restored to the UK commercial property sector where direct bricks and mortar funds have generated income-driven, steady returns.
We are approaching the summer doldrums where corporate, political and economic news-flow starts to slow. Although we are not advocates of market timing to guess short-term market trends, investors worried about the current market level as an entry point could consider drip-feeding monies into the market. But even with some equity indices reaching all-time highs, we believe that across global stockmarkets there are areas offering enticing long-term growth prospects and 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.