Our Investment Commentary for Q4 2014 (1 October – 31 December)

World markets experienced a very volatile quarter which included a sharp sell-off in equities at the beginning of October. However, sentiment quickly returned, reflected by a gain of 4.13% for the FTSE World Index in Q4.

However, threats to the global economy remain, so investors are likely to continue to be cautious in 2015. The UK economy has shown further signs of improvement, but again the FTSE 100, which was virtually unchanged in Q4, underperformed global equities. This is largely due to the FTSE’s sizeable exposure to the oil and mining sectors. On the other hand, the US market has had a very good quarter, climbing 6.17% to an all-time high. The Eurozone continues to pose a threat to the global economy and China’s economic slowdown is concerning, particularly for emerging markets which have recently been adversely affected by the tumbling oil price. The shock to the price of oil, to a large extent, reflects a decline in global demand, which is clearly impacting sentiment across world markets.

Not many people would have predicted another good year for UK gilts, however, continuing low interest rates has led to a return of 13.86% for investors between 2013 Q4 and 2014 Q4. This is a higher total return than a sterling investor would have received from world equities, namely 11.29%. Index-linked gilts have performed even better as the average maturity is generally longer and thus more sensitive to interest rate changes, so have been particularly helped by low rates. Property has also benefitted from the benign interest rate picture, offering diversification for investors’ portfolios and an attractive yield, with particularly strong returns coming from London and the South East in prime offices and selected industrial and leisure units.


Despite another quarter of largely positive economic data, there has been a lot of uncertainty over the position of the global economy as well as the future of the UK politically. As a result, the UK equity market was left virtually unchanged in Q4. 

According to the Chancellor, George Osborne, the UK is the fastest growing economy in the G7. UK growth is forecast to be 3% for 2014, up from 2.7% previously predicted, while inflation is expected to be 1.5%. As mentioned in the Autumn Statement, inflation is expected to be lower in 2015 which is due to a lack of inflationary pressure on both wages and prices. Furthermore, the UK faces a concerning level of private debt (as a percentage of GDP), so we anticipate a prolonged delay to a rise interest rates.


The US market continued to perform well this quarter, climbing 6.17%, following further positive economic data. The strengthening dollar has meant sterling investors have seen another quarter of magnified capital gains; a total return of over 10%. Robust US consumer spending data has boosted investor optimism. Given that real wage growth has been virtually non-existent, a tumbling oil price has certainly helped ease the cost of living and increase the level of individuals’ discretionary income, which has in turn aided the consumer goods market and wider economy.


The Eurozone economies have faced another difficult quarter of stagnation. Like the UK, the European equity market was virtually unchanged this quarter. In November, Mario Draghi signalled that the bank is ready to “step up the pressure” and expand its stimulus programs if inflation fails to quickly return to the bank’s target. As a net importer of oil, usually a falling oil price would be welcomed by Europe. However, it is adding fuel to the ongoing worries over deflation, which are posing two major threats to the Eurozone economy. Firstly, consumers and firms will tend to delay spending and investment in a deflationary environment, reducing aggregate demand. Secondly, the burden of real debt is becoming more pronounced, making it more difficult to reduce debt-GDP ratios across the region.

Investors will no doubt be keeping a close eye on the performance of the Eurozone economy in 2015 as it is currently posing a significant threat to global financial markets.


China’s equity market performed well this quarter, rising by over 7%. However, the economy has shown further signs of slowdown which has led to an interest rate cut in an attempt to revive the flagging economy. November’s disappointing factory and investment growth figures hit a 13 year low, indicating that 2014 GDP growth will fall short of Beijing’s 7.5% target and contribute to the weakest expansion of the Chinese economy for 24 years. This slowdown will continue to send tremors through the global economy, in particular to countries with strong links with China.

After winning a two thirds majority in the December election, it is crucial that Shinzo Abe delivers the economic reforms he has promised for the last two years. Q3 saw some surprisingly aggressive money printing by the central bank in an attempt to revive consumer spending and stave off deflation. However, consumer sentiment is still weak due to falling real incomes and the economy has slipped into recession. It seems paramount that Abe introduces sustainable measures such as labour market reforms to encourage long term economic prosperity. The Yen is likely to continue to weaken in 2015 as the central bank is expected to persist with QE. The depreciation of the Yen this quarter has eroded the gains for sterling investors from 8.51% to 3.05%.

Emerging Markets

Emerging market economies, such as Brazil and Russia, have faced an extremely tough quarter. The slowdown in GDP growth in China has impacted emerging markets and the sharp cut in the oil price has exacerbated the woes for countries which rely heavily on oil revenues. 70% of all tax revenues in Russia come from oil and gas, so the economy has been facing a worsening budget deficit which will, at some point, need financing. Furthermore, the Russian economy has been hit by overseas sanctions and has a current inflation rate of close to 10%. The weaknesses of the economy are reflected by the rouble which has lost over 45% of its value against major hard currencies in 2014. The Russian central bank has reacted strongly to defend the rouble, increasing interest rates to 17%.


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



Performance 2014 Q4 (% change) GBP


2013 Q4 – 2014 Q4 (% change) GBP

Performance 2014 Q4 (% change) Local currency

Performance 2013 Q4 – 2014 Q4 (% change) Local currency


FTSE 100






S&P 500






FTSE Europe Ex-UK






MSCI China






Nikkei 225






FTSE World





UK Gilts

FTSE All-Stocks






There are many downside risks which are providing significant headwinds for global markets and, in our view, this is likely to bring further volatility as we look ahead to 2015.

One major global concern is the continuing struggles facing the Eurozone. Mario Draghi may well have to ‘step up the pressure’ and expand his stimulus programme in stagnant Europe if fears of deflation continue. However, this will not provide a long term solution to the wider problems in the Eurozone. A movement towards a budgetary and political union seems paramount to long run prosperity.

China’s economic slowdown also remains a concern for global markets and, in particular, poses a significant threat to emerging economies, which are now on the verge of a crisis. This has not been helped by a strong US dollar as the US moves closer to increasing interest rates on the back of an improving economic picture. A plummeting oil price has impacted net exporters of oil, such as Russia, exacerbating the economic frailties of many countries.

The UK and US economies have performed relatively well, but it remains to be seen when the Bank of England and Federal Reserve will look to contract monetary policy. Currently there is a lack of inflationary pressure in both countries but, if that changes, expectations of an interest rate hike will certainly be brought forward.

Despite positive economic progress in the UK, investor sentiment has clearly been damaged by global economic downside risks and uncertainty over the forthcoming general election in May and the possibility of an EU referendum. As a result, the UK faces a challenging year, so we maintain a defensive investment approach to UK equities as well as global markets.

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, 2 January 2015]

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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