Market Outlook Report – August 2017

Market Overview

Whether you have been invested in the stock market for the past ten years, or ten months, chances are that your shares have performed well. Stock markets around the globe have been in a bull market, a period of shares rising without significant interruption.

US markets have had an impressive eight years of growth with the S&P 500 index of blue-chip companies, the technology-focused Nasdaq and the Dow Jones industrial average all hitting successive highs. It’s a similar story around the world. The UK’s FTSE 100, Germany’s Dax and the MSCI World index, which tracks a basket of global stocks, have had few interruptions and also risen to record peaks. Now a question mark hangs over when the bull market will end.

One reasons for such unease is that economists believe that the billions created through central banks’ quantitative easing programmes has flowed into stock markets. Very low interest rates (and negative rates in some countries) have helped to push down the returns on bond investments, so investors have put their money into stock markets instead, not always for the best reasons. Investors have shrugged off worries about company valuations (such as the price-earnings ratio, a key indicator of value in shares) and stocks have continued to rise.

Equity markets are richly priced on the basis of pretty much every valuation metric there is. The futility of getting anyone to care about prices, after years of central bank stimulus have helped share prices more than triple, seems evident

Nandini Ramakrishnan 
Global Market Strategists - JPM Morgan

This why the Reeves Investment Team recently decided to disinvest in the selected global markets. This decision has proven to be a wise one, particularly in respect of the US funds, which have subsequently declined in value since we reduced our exposure. Examples include Fidelity American Special Situations, Fidelity Special Situations W Acc, Jupiter North American Income Acc, & Schroder US Mid Cap Acc.

Large-Cap and Small-Cap Funds

The FTSE small-cap index and the FTSE 250 index of mid-cap stocks have beaten the FTSE 100 index of large-cap stocks over the past one, three, five and ten years. In the five years to August the FTSE 100 produced a return of 54.9 per cent. However, the FTSE mid-cap index returned 99.3 per cent and the small-cap index returned 114.6 per cent, more than double the figure for the FTSE 100. There is a similar performance gap between large-cap and small-cap funds and it holds true whether you are investing in the UK, Europe, Japan or the US.

Our model investment portfolios are well balanced with regards to large-cap and small-cap funds, with Reeves clients enjoying some attractive returns particularly from our selection of smaller cap funds. For example, Threadneedle Eurp Smlr Coms Z Inc GBP has increased in value by 18.12% over the past six months & 25.62% over the past year. Schroder European Sm Cos Z Acc has increased in value by 21.73% over the past six months & 33.48% over the past year. JPMorgan Mid Cap investment trust has increased in value by 13.86% over the past six months & 24.66% over the past year. A further and final example is JPMorgan European Smaller Comp investment trust, which has increased in value by 19.19% over the past six months & 25.22% over the past year.

Asia

Japan has just enjoyed its sixth consecutive quarter of growth — its longest continuous run for more than a decade. GDP expanded at a rate of 4 per cent in the three months from April to June, boosted by stronger consumer spending and business investment. Couple this with a drive to improve corporate governance, appointing more outside directors to boards, and giving greater consideration to shareholders, and there is plenty of reasons to be positive about the Japanese stock market.

This is reflected in a star performer in the Reeves model Balanced portfolio, the Baillie Gifford Shin Nippon PLC investment trust, which focuses on smaller companies, which are in better shape than their larger peers, with healthier earnings growth. Its share price has increased by 10.85% over the past 3 months and 39.47% over the past year1 and was highlighted as a recommended Japanese fund in the Sunday Times on 20 August.

Reeves Model Investment Portfolios

Overall, our model investment portfolios have performed very well, as illustrated in the graph below, which compares the performance of our Cautious, Balanced and Adventurous investment portfolios, compared with the FTSE All Share Index.

Reeves model portfolio performance vs FTSE ALLSHARE

As one might expect in a relatively buoyant (if erratic) stock market, the higher risk Adventurous portfolio has enjoyed greater returns. An important point to highlight is that the above performances have been achieved by well-balanced and diversified portfolios, in which we have retained substantial cash reserves, based on our growing unease about a possible correction in global markets in the foreseeable future. Therefore, our clients have enjoyed good investment performances without being exposed to very high risks. Our intention is to maintain this investment strategy and positive investment outcome for our clients.