Our Investment Commentary for Q3 2016 (1 July – 30 September 2016)

The Summer and early Autumn have seen some pleasing returns for UK investors, as continued sterling weakness has flattered overseas returns. Indeed, over the last year, sterling has fallen by almost a fifth against the dollar and euro and over a third against the yen.

The UK has temporarily at least shaken off the gloom in the wake of the Brexit vote as the FTSE-100 delivered its best quarterly performance in last three years outstripping other developed markets. However, economic forecasts are universally muted for the UK economy as the uncertainty of Brexit stalls business investment and the risk of stagflation looms with a weak currency leading to imported inflation and low growth, particularly in respect of a trade deficit with the EU.

The US economy has continued to perform well with analysts projecting positive corporate earnings growth in 2017. The low oil price has given a boost to consumer spending, adding to the appeal of the US market as a perceived safe haven for investors. There are two major risks – the outcome of the US presidential election in November and the impact a victory for Trump could have on markets; and the timing and pace of US interest rate rises.

The risks in China seem to have receded for the time being as stimulus measures bear fruit, but concerns remain regarding the fragility of the banking system and enormous levels of debt. Japan launched a fresh $45b stimulus package in August to kick-start its economy focused on infrastructure and welfare, but it remains to be seen how successful it will be. Emerging markets have rallied strongly as the US has postponed increasing interest rates and commodities have recovered some lost ground.

The Eurozone faces significant challenges, most notably Brexit, but also the risk of weak banks in both Germany, particularly Deutsche Bank, and Italy. In addition, general elections loom in both Germany and France in 2017.

Markets face significant headwinds in our view over the coming months with rising populism, stalled globalisation and lingering political uncertainty. However, governments are alert to the risks and we expect the purse strings to be loosened as austerity is tempered with significant spending on infrastructure to stimulate growth.

Overall, the interplay of these factors is likely to result in significant volatility, highlighting the benefit of our diversified investment approach. Such volatility is not new – over the past 35 years, the US equity market has experienced an average drop of 14% from high to low during each year but still had a positive annual return more than 80% of the time (source: Fidelity).

Market Index Performance 2016 Q3 (% change) GBP Performance

2015 Q3 – 2016 Q3 (% change) GBP

Performance 2016 Q3 (% change) Local currency Performance 2015 Q3 – 2016 Q3 (% change) Local currency
UK FTSE 100 5.86 18.38 5.86 18.38
US S&P 500 5.66 33.72 3.47 14.67
Eurozone FTSE Europe Ex-UK 7.03 21.77 4.09 3.81
China MSCI China 16.38 31.71 13.94 13.05
Japan Nikkei 225 8.59 30.47 4.89 -5.40
Emerging Markets MSCI Emerging Markets 10.65 36.18 7.08 12.96
World FTSE All World 6.62 29.85 4.32 10.50
UK Gilts FTSE All-Stocks 1.86 12.64 1.86 12.64

Our Strategic Asset Allocation

Portfolio Cash/Bonds % Equities % Alternatives (e.g. Property/ Infrastructure) %
Cautious 50-90 10-40 5-20
Income 25-65 25-65 5-20
Ethical 25-65 25-65 5-20
Balanced 25-65 25-65 5-20
Growth 5-25 60-90 5-20
Adventurous 2 88-100 0-10

Current Positioning

Cautious: Bonds/Cash: 50, Equities: 39, Alternatives: 11

Income: Bonds/Cash: 25, Equities: 65, Alternatives: 10

Ethical: Bonds/Cash: 36, Equities: 47, Alternatives: 17

Balanced: Bonds/Cash: 25, Equities: 65, Alternatives: 10

Growth: Bonds/Cash: 5, Equities: 90, Alternatives: 5

Adventurous: Bonds/Cash: 0, Equities: 95, Alternatives: 5

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, 3 October 2016]

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.

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