Detailed Market Outlook Report – April 2018

Detailed Market Overview

April 2018

Recent Global Market Turmoil

The FTSE 100 index of leading shares has fallen by about 600 points in the past three months and, despite a recent rally, is almost 3.5 per cent below its peak of 7,778 in mid-January.  So far the falls represent a correction rather than a crash, but they serve as a warning to investors.

April witnessed a steady trickle of downbeat news, including:

  • CBI’s Industrial Trends Survey showing that factory order books struggled to make much ground in the three months to April;
  • Britain’s manufacturing sector has registered its first drop in almost a year, according to official figures that add to signs that the economy suffered a slowdown in the first quarter.  The data from the Office for National Statistics came alongside figures showing the UK’s trade deficit widened while the construction sector suffered another sharp drop in output. 
  • Personal insolvencies have hit a near six-year high, while underlying corporate failures are at their highest level since the first quarter of 2014;
  • March was the second consecutive month in which the rate of inflation fell, the first time this has happened since September 2015.  The slowdown in inflation led some economists to argue that the Bank of England’s case for raising interest rates in May has weakened.
  • The UK economy ground to a near standstill in the first three months of the year, suffering the weakest period of activity since 2012, according to the Office for National Statistics (ONS).  This was significantly worse than the Bank of England had been expecting and is added further weight to the reduced chances of a rise in interest rates when Bank of England policymakers meet next month;
  • Consumer spending has fallen by the largest amount in almost six years as Britons feel the pressure on their finances, figures from Visa show.  Uncertainty surrounding Brexit, wage stagnation and creeping inflation are weighing on consumer confidence, which has contributed to the largest quarterly fall in spending — of 1.4 per cent — since the final quarter of 2012, according to Visa’s consumer spending index.
  • Growth in the eurozone economy has “downshifted markedly” since the start of this year, according to the purchasing managers’ index, which is considered one of the best indicators of how the eurozone is performing;
  • US stock markets tumbled last week, as yields on benchmark government bonds climbed above 3 per cent for the first time since 2014, raising the fear of steeper borrowing costs;
  • US Gross domestic product (GDP) rose by 2.3 per cent annualised in the first quarter, slower than the 2.9 per cent reported in the last three months of 2017.

Whilst there are always conflicting signs regarding economic growth and the prospects for investors, the Reeves Investment Team remain cautious in the current uncertain environment.  Our main priority at the moment is to protect our clients’ wealth.  Whilst we retain a diversified, risk-averse exposure to a wide range of geographical and market sectors, we are maintaining a sizeable cash reserve and maintaining a cautious approach to our overall investment strategy for the time being.

This approach has payed off for our clients, with all of our model investment portfolios outperforming the FTSE Allshare Index over the first quarter of 2018.

Once again, all of our model investment portfolios have performed better than our FTSE All-Share Index benchmark over the past quarter.  Also, our model portfolios have behaved in the orthodox manner we would expect during a market correction.  In a bullish market when the FTSE All-Share index is in positive territory, we would expect our Adventurous model portfolio to outperform our Balanced portfolio and for our conservative Cautions fund to bring up the rear.  Conversely, when there is a market correction and the FTSE All-Share index is in negative territory, we would expect our Cautious model portfolio to show more resistance/resilience, and perform better than our Balanced and Adventurous portfolios.  



Reeves Model Investment Portfolios

Although it’s been a challenging start to the year in performance terms, we have been consistently pleased with the ongoing resilient performance of our model investment portfolios.  The year ahead poses many macroeconomic & political challenges both domestically & globally, but we have positioned the portfolios to offer wide diversification, underpinned by a solid cash element whilst market uncertainty and volatility persists.  Alongside extensive geographical and market sector diversification, we have recently realigned our strategic exposure special situations, in order to exploit parts of the market that are unloved, undervalued and where sustainable growth prospects are very much under-appreciated.  As such, we remain very confident that the strategy we are pursuing is highly appropriate for the prevailing economic and market conditions, and capable of delivering attractive, positive long-term returns.

Below, you can see the individual fund performances of the selected investments within our model portfolios. (ordered monthly)

** The history of this unit/share class has been extended, at FE's discretion, to give a sense of a longer track record of the fund as a whole.

Source: FE Analytics software provided by Financial Express Investments Ltd (part of Financial Express (Holdings) Limited) as at Saturday 28 April 2018.

Scottish Mortgage Investment Trust PLC

The Reeves Investment Team have for some time been strong advocates of the Scottish Mortgage Investment Trust PLC, which has been established as a long-term cornerstone of our model investment portfolios.  The company has served our clients well and continues to do.  In the wider investment market, the Scottish Mortgage investment trust remains one of the most popular and best-performing in the UK.  Part of the FTSE 100, it has a market value of £6.5 billion and returned 179 per cent over the past five years.

Recent wobbles on Wall Street have made some investors question whether the end of the nine-year bull market is near.  James Anderson, the trust’s co-manager, believes the next downturn will be characterised by the demise of “old economy” stocks, such as utilities or banks, and a reinforcement of “new economy” companies, such as technology and disruptive healthcare.

“There is a presumption that we have run the course of the bull market, that when markets go down you should suffer.  I think the next bear market will reveal the fragility of a lot of traditional companies.  I get very worried when people say you should be safer by favouring out-of-favour investments, that they should be OK in a bear market.  I think we will have a phase of destruction of old companies in favour of the new.”

This perspective is reflected in the trust’s holdings; Amazon remains the largest holding, while China’s Tencent, an internet company, and Alibaba, an online retailer, are the second and third. It also holds Facebook and Alphabet (the parent company of Google).  Exposure to those companies can mean the trust is sold when sentiment towards big tech sours, which is what happened this week.  However, the trust’s shares were lifted as one of its holdings, Spotify Technology, the music streaming service, debuted on the stock market.

Shares in Amazon, which have risen 521 per cent in the past five years, have been a key driver of the trust’s performance.  They are trading on a price-earnings (PE) ratio of 313. Mr Anderson believes the company is “the most financially disciplined in the world.  Amazon does not run the business for short-term earnings.  If it didn’t make money from Amazon Prime for a decade, it won’t matter.”

He refutes suggestions that the tech giants are too richly valued.  “Their opportunity is bigger, their competitive advantage and the longevity of their businesses is greater.  Amazon is a good example of that.  I don’t think there is anything extreme about the valuation of Facebook or Tencent compared with growing companies in the past.  The fact that their share prices have risen and they have gone up in value does not matter, and the same goes for their Price-Earnings ratios.”

China remains a dominant theme in the trust.  “We are worried that other investors are underestimating the importance of China,” he says, adding that the country has “probably overtaken” the US in terms of the sophistication of research and goods it produces.  He recently took a stake in Nio, a company he predicts will be the Chinese equivalent of the US electric car company Tesla.  Through the trust’s stake in Alibaba and Tencent, it also has exposure to unlisted companies in China, many of which are backed by the two tech giants.