Our Investment Commentary for Q1 2014 (1 January – 31 March)

The majority of broker reports seemed to indicate the FTSE100 would break through 7000 points for the first time and some even suggested 7500 may be possible by the end of the year. However, Q1 has seen us off to a slow start with UK markets showing little change since the New Year, slightly lagging the world index. Events such as the tensions in Crimea caused worldwide volatility whilst a strengthening dollar hindered emerging market exports.

Markets make a stuttering start to the year in Q1

UK

Economic data released throughout the first quarter has painted a much brighter picture than the sluggish market performance suggests. Figures released in January indicated that UK business optimism had hit a 22 year high and unemployment fell to 7.1%. We also witnessed a strong period for UK retail sales which grew at the fastest rate since 2011 and more recently it was revealed that UK car sales in March were the highest monthly sales for ten years.

Towards the end of the quarter, news that the Bank of England has upgraded its expectation of growth this year to 3.4% buoyed markets. Strong rallies in the housing market driven by government incentives and the need to build have further contributed to growth. Despite unemployment falling to 7.1%, Mark Carney confirmed there would not be imminent interest rate rises despite the target rate of 7% expected to be reached in the coming months.

United States

In the US, the S&P 500 showed negligible gains overall for the quarter. Market confidence grew following a pick-up in M&A activity which looks set to continue throughout the year. Despite positive economic data, it looks likely that interest rates will remain low, even once the Federal Reserve’s target of 6.5% unemployment is reached, which currently stands at 6.6%.

US monetary policy remained the main driving force behind the global economy, particularly affecting emerging market economies which are largely reliant on exporting goods. With the Federal Reserve expected to continue to reduce quantitative easing, there is widespread concern that rising interest rates and a strengthening dollar against emerging market currencies could have a negative impact on those economies.

Asia

The slowing of China’s growth continued throughout Q1 as the focus of its economy switches focus from exports to domestic consumption. Growing concerns over its credit risk and unanswered questions surrounding the stability of its financial system pushed the Hang Seng lower. However, more recent hopes of stimulus measures to support the Chinese economy boosted the index and the news was also welcomed by emerging market stocks.

Outside of China, a recent flow of weak economic data has cast doubts over Japan’s growth. However, unemployment is at its lowest since 2007 and salaries at Japan’s biggest banks look set to rise for the first time in 19 years. The Tokyo Stock Exchange is significantly down this year which many see as a buying opportunity, however we remain watchful over what is a very complex economy.

It has been encouraging to see the strong recovery which has recently taken hold in India prior to their upcoming election which should offer a good indication of the future direction of the Indian economy.

Eurozone

The Eurozone continues to show signs of growth and in comparison to markets worldwide, has had a reasonably strong start to the year, up 2.9% following strong jobs data in the last month. Forward looking survey data is suggesting the Eurozone economy is continuing to expand steadily, however unemployment figures of approximately 12% remain a worry and very low rates of inflation suggest a full recovery is still some way off and further cuts to interest rates may be made in the coming months.

Final GDP figures for the 4th quarter of 2013 showed an improvement for the majority of European economies and revealed Italy has finally exited recession. Despite this encouraging outlook, bank lending remains tight and availability of loans to the private sector remains subdued. However, it is expected that the European Central Bank will soon loosen lending conditions in an effort to mitigate the risk of deflation which is currently threatening the Eurozone’s fragile recovery.

Emerging Markets

The majority of emerging market economies remain a concern, where weak currencies and steep inflation have hindered exports. In Europe, we witnessed the Turkish Lira fall to a record low of 2.3 against the dollar, whilst in South Africa the rand hit a five and a half year low.

Conflict between Russia and Ukraine caused a spike in oil prices and sharp drops in markets worldwide however tensions do now seem to have eased somewhat and markets have recovered well. In Latin America, hopes of policy intervention in China, Brazil’s largest trading partner, buoyed the Bovespa, which returned 5.0% in the last month.

Markets

The table below shows the performance of key global markets in local currency and UK sterling terms, including dividends re-invested between 1st January and 31st March and for the full year (31st March 2013 – 31st March 2014).

Despite volatility, investment markets for Q1 remained flat in the main, with Japan and China showing more significant losses than Western markets. Data for the first quarter of 2014 looks particularly weak when compared with gains over the year. Government bonds showed small gains due to uncertainty surrounding equities. Currency has played a role in global returns for a sterling investor; this quarter and throughout the last year, sterling’s strength dented returns from major overseas markets.

Outlook for April to June 2014 (Q2)

We remain positive on equities over the medium to long term and believe that the flat start to the year could represent a good buying opportunity, particularly if broker reports of a strong year ahead for equities are to be believed. Worldwide data, particularly from countries with developed economies continue to paint an increasingly positive picture as the global recovery progresses into Q2.

We expect the recent rally in global bond purchases will be short lived as global market stability returns. Aside from currency issues, the outlook for the majority of economies looks positive with 80% of countries surveyed by Markit witnessing expansion in their respective manufacturing sectors, a good indicator for economic growth.

The effects of tightening monetary policy, particularly in the US, are being felt worldwide. In the short term we may see some emerging market economies struggle as a result, however it can only be a good thing that we are finally starting to see an end to aggressive stimulus policies. Taking a longer term view, we expect markets to stabilise and continue to offer attractive returns.

The timing of the first US interest rate increase will remain a hot topic and last week the Federal Reserve chair, Janet Yellen suggested that rates will rise six months after tapering of the Fed’s monthly asset purchase programme is completed. Tapering is currently expected to end in November this year, suggesting that rates may begin to rise around May 2015.

The slowing of growth in China and Japan will remain a concern throughout 2014 and could have a further negative impact on smaller emerging markets. Equity markets in Asia will be monitored closely and any further dips may represent a buying opportunity in these often cyclical markets.

Europe will also be closely monitored and any loosening of monetary policy could provide a buying opportunity for European equities.

We still expect positive returns for equity markets worldwide throughout 2014, however recognise that events such as the tensions in Crimea can cause uncertainty in a truly global economy.

Our Approach

Our approach is to help our clients benefit from attractive equity returns and target sustainable dividends from a diversified portfolio, on the basis of our diligent research and analysis to highlight interesting investment opportunities and mitigate risk as far as possible.

[Matthew Clark, Seabrook Clark Ltd, 10 April 2014]

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.