Our Investment Commentary for Q3 2013 (1 July – 30 September 2013)

Our view is that the relatively narrow trading range of the FTSE-100 in the last three months is a pause for breath as investors weigh up the generally more positive economic outlook with the continuing worries of indebtedness, Eurozone weakness and the tapering of economic stimulus, known as Quantitative Easing (QE). At least the lower level of volatility this quarter has marked a welcome change from the rollercoaster path that markets followed earlier in the year, with market movements in May being a prime example. It is heartening to see that the FTSE-100 including dividends has delivered 12.6% over the first nine months of 2013.

Long Awaited Stability

Although it was widely expected that Quantitative Easing (QE) could be tapered this September, perhaps surprisingly, the US Federal Reserve has decided to maintain its $85b per month economic stimulus programme. Despite falling unemployment figures, comments by Ben Bernanke, Chairman of the US Federal Reserve, have altered market expectations to a reduction in the level of QE towards the end of this year, with plans to end QE altogether when US unemployment hits 6.5%, potentially sometime in 2014. Global markets have reacted positively to this delay in the tapering of stimulus programmes.

In the UK, Mark Carney has been generally well received as the new governor of the Bank of England. He proposes a more open style with ‘forward guidance’ to markets. He has decided not to increase the level of QE from the current £375b, which has given sterling a shot in the arm. However, he proposes to keep interest rates low until unemployment falls to 7%, which is probably likely to happen in 2015.

There has also been positive news for the UK economy which grew 0.7% in the second quarter compared with growth of just 0.4% in the first quarter. This growth looks set to continue with figures expected to be around 1% growth for Q3. Part of this growth can be attributed to the recent recovery in property prices. Low interest rates, an easing in the mortgage market and the government’s ‘Help to Buy’ scheme have seen house prices rise by approximately 5% over the last year. Provided a property bubble does not develop, particularly in London, where average prices are up approx 10% over the last year, the housing market should continue to help sustain growth in the UK economy.

The European Central Bank (ECB) committed in July to keep interest rates at record lows for as long as necessary. Inflation in Europe is also running at its’ lowest rate for three years and economists say this should give the ECB more freedom to help the Eurozone’s slow recovery by loosening monetary policy. In fact, over the quarter, Eurozone stocks outperformed other regions for a sterling investor.

As part of its plans to quell fears of a credit crunch, China looks set to reform its policy on consumer finance in an attempt to bring more private capital into lending markets. This should restore growth in retail sales which have been particularly sluggish in 2013.

Still a Cause for Concern

Despite the relative recent period of calm in the markets, there will no doubt be further volatility in share prices as the global economy continues on the road to recovery. The sensitivity in the UK market was demonstrated recently, when the Labour Party announced a potential freeze on energy prices following the 2015 election. This wiped approx £1 billion off the value of the energy sector. The level of business investment in the UK remains a concern too as the UK economy struggles to rebalance itself.

The markets also felt the effects of the recent US government shutdown. This followed a failure to agree a new spending bill for the end of the financial year as a result of a rejection by the Republicans of President Obama’s proposed healthcare reforms. Whilst our own economy may appear to be turning a corner, in a globalised world we are not isolated from events elsewhere across the world.

Despite signs of a long awaited recovery, the Eurozone overall is still in recession and unemployment figures remain high, reducing the probability of strong economic growth in southern Europe. However, Germany and other parts of northern Europe continue to perform well. Furthermore, it is important to distinguish between European companies, many of which are world-beaters, and the economic and political challenges facing the Eurozone.

Markets

The table below shows the performance of key global markets in local currency terms, US dollars, and UK sterling terms, including dividends re-invested between 1^st July and 30^th September:

In general, worldwide indexes have performed better in Q3 than in Q2 with markets showing steady gains with a particularly strong quarter of growth shown in Europe and China. Once again we see currency playing a decisive role in global returns for a sterling investor; this quarter, sterling’s strength has dented returns from most overseas markets.

[Matthew Clark, Seabrook Clark Ltd, 4 October 2013]

Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.