Market Outlook Report – February 2017

Overview

All of the individual holdings recommended in our model Balanced Investment Portfolio have produced positive returns over the past month and 3 months. The annual returns produced by our long-term holdings are very pleasing and will have benefited most of our clients. Our recent investment judgements have delivered positive results to date. However, we are conscious that key global equity markets are at an all-time high and they will inevitably level-off at some point. The challenge is to judge when this pause for breath will occur.

Last month, we reduced our cash proportion and cautious fund holdings, which has enhanced overall returns from our model investment portfolio. Investments in oil and gold ETFS’s have performed well, as has our increased exposure to the US and the financial sector. The ‘Trump Effect’ and its momentum were the key drivers to our increase in exposure to US equities.

Reeves Balanced Portfolio Version 17C - 22/02/2017

NameTotal Ret
1 Mo
(Daily)
Total Ret
3 Mo
(Daily)
Total Ret
6 Mo
(Daily)
Total Ret
1 Yr
(Daily)
AXA Framlington Global Technology Z Acc6.728.3417.5851.58
Henderson Global Technology I Acc5.5010.5817.1646.19
TR Property Ord4.348.10-5.2415.41
iShares Core S&P 500 USD Acc4.207.6216.4439.28
JPMorgan Mid Cap Ord4.086.007.4313.54
Jupiter North American Income Acc3.897.4515.3339.25
Jupiter Financial Opportunities Inc3.846.369.8827.47
Baillie Gifford Shin Nippon Ord3.455.509.8832.84
AXA Framlington Financial Rl Acc3.417.7720.6946.08
AXA Framlington Biotech GBP Z Acc3.381.922.4023.53
Schroder US Mid Cap Acc3.254.7316.2443.89
Liontrust Special Situations I Inc2.899.806.4228.04
Fidelity Special Situations W Acc2.706.7910.0629.06
Marlborough Special Situations P Acc2.6510.1510.2423.25
Empiric Student Property PLC2.624.629.5512.33
Summary2.496.167.9323.15
MedicX Ord2.483.598.7713.43
Fidelity American Special Situations2.393.1212.0135.35
Benchmark:FTSE AllSh TR GBP2.176.907.2427.01
GCP Student Living Ord1.806.920.1514.85
IP High Income Acc1.594.590.509.15
Target Healthcare REIT1.563.734.717.76
Lazard European Smaller Coms C Acc1.438.975.3223.32
Investec Cautious Managed I Acc Net1.144.648.0020.40
Threadneedle Eurp Smlr Coms Z Inc GBP0.9710.483.7524.02
Threadneedle UK Prpty Authrsd Invmt IGA0.887.258.74
F&C UK Property 2 inc0.642.034.942.54
Aberdeen UK Property I Acc0.512.366.01-0.88
Schroder European Sm Cos Z Acc0.088.436.6027.14
JPMorgan European Smaller Comp Ord0.088.003.6924.56
Tritax Big Box0.000.002.438.51

For technical reasons, the performance figures produced by Morningstar didn’t include a full range of statistics for Tritax Big Box and the system cannot produce statistics for the two Exchange Traded Fund Securities included in our model portfolio (ETFS Brent Oil 1 month ETC & ETFS Physical Gold)

The composition of the above model portfolio has since been reviewed by the Reeves IWM Investment Team on Wednesday 22 February 2017. We are very pleased with the performance of our diversified model investment portfolios (as detailed in our Market Outlook Report). Following last month’s changes, we are closely monitoring both our cash position and our property investments. 

We are seeing clear predicted evidence that some of our bespoke investment clients are experiencing mixed results, reflecting the inherent risk-reward trade-off. Exposure to single equities has the potential to produce startling results, both positive and negative. The downside risks have been amply reflected in the recent performance of HSBC Holdings PLC and Pebble Beach Systems Group PLC, with which some of our clients will sadly be all too familiar.

Regular Contributions

We have established past success in identifying cyclical market sectors that have routinely taken a market dip, which we have exploited by making timely regular investment purchases in appropriate funds as the sector recovers. The benefits for our regular, periodic investors have been compounded by the benefits of ‘pound-cost-averaging’ and we have identified the current Biotech sector as a strong prospective market for our regular, periodic investors.

Biotechnology shares have welcomed this year in style, marking a striking reversal from last year’s dismal performance. Part of the rebound in biotech can be attributed to the “January effect”, where bargain-hunting investors parked money into biotech firms which are trading at a discount to their market value as they had been offloaded in December to realize tax losses. Biotech companies are also staging a comeback following Donald Trump’s victory on expectations of relaxed regulations. Banking on these positives, investing in biotech funds seems to be prudent. We have identified the AXA Framlington Biotech Fund as a strong contender to ride this cyclical recovery.

UK Economy

Despite dire predictions to the contrary, Britain’s economy held up very well in the second half of last year in the aftermath of the vote to leave the EU. Consumers have started 2017 with renewed confidence in their personal financial situation but remain concerned about the wider economy, despite record high employment and the UK economy growing faster than any other G7 nation in 2016. Factories have also started 2017 on the front foot, with total orders climbing to their highest level in nearly two years and optimism about future prospects surging well above average. The CBI industrial trends survey found that a balance of 5 per cent of companies had a rise in orders in January, the best reading in 23 months.

The CBI Business Optimism in the UK for the first quarter of 2017 increased to +15 from -8 in the previous period

In terms of the UK’s future prospects, a leading forecaster has predicted that the economy will grow at a faster rate than that of the eurozone and will be beaten only by the United States out of the G7 nations this year, 18 months after the vote to leave the European Union. Unsurprisingly, City economists are performing a collective U-turn on the impact of Brexit, echoing the Bank of England’s sharp revision to its growth forecast. Similarly, the European Commission has been forced to admit that projections for a rapid slowdown in the British economy after the Brexit vote were wide of the mark. However, employment growth has flattened in recent months and inflation is on the up.

Reeves IWM has been very well placed with its model investment strategy, with proportionate exposure to the UK economy within selected sectors (e.g. property, technology & biotech), as well as exploiting wider economic growth within both the FTSE 100 and FTSE250 markets. This is reflected in the investment performance table contained in our detailed Market Outlook Report.

UK Inflation

Consumer prices in the United Kingdom rose by 1.8 percent in the year to January 2017, following an 1.6 percent gain in the previous month but below market expectations of 1.9 percent increase. Still, it was the highest inflation rate since June 2014, mainly boosted by rising cost of fuel. With growing inflation, the Bank of England could start the process of “normalising” interest rates this year. The economy has been notably stronger than it expected when it made its emergency post-referendum cut in Bank rate to 0.25% in August. Since then, it has revised up its 2017 growth forecast more than once and has also been forced to reverse its forecast that unemployment would rise after the Brexit vote, cutting its estimate for the number of jobless.

UK Inflation

Monthly inflation rate figures for the United Kingdom are reported by the Office for National Statistics

Europe

Job growth in Europe has hit a nine-year high, with the unemployment rate falling below 10% for the first time in seven years. A series of business surveys published this month suggests the eurozone as a whole is growing at its fastest rate since 2011. Spain is leading the way, notching up growth of 3.2% last year. Terrorist attacks across north Africa have diverted Europe’s tourists back to the Costas; a record 75m foreign visitors went to Spain last year, according to UN figures released last month. Although France and Italy posted relatively sluggish growth of 1.1% and 0.9% respectively, the German powerhouse continued to chart a respectable 1.9%. Inflation has even returned to the eurozone, hitting 1.8% in January. That’s a mixed blessing, of course, although a sign of relative normality for a region that was threatening to slip into a deflationary spiral only a year ago.

Our model portfolios have a solid European exposure, particularly in the smaller companies sector, which has seen strong growth and we believe offers further potential for investment returns.

US

Inflation soared to a five-year high in the United States last month, far more than economists expected, boosting the chance that the Federal Reserve will raise interest rates next month. Prices rose by 0.6 per cent in January compared with December, double the expected gain. A jobs boom that began under President Obama continued apace during the handover to Donald Trump last month, with American employers hiring considerably more staff that expected.

Donald Trump

A jobs boom that began under President Obama continued apace during the handover to Donald Trump last month, with American employers hiring considerably more staff that expected

The uncertainty and risks associated with Donald Trump’s presidency are widely felt, but for now, with his vehement, ‘Made in the USA’ mantra and driven domestic economic policies, the US is well presented in our model portfolios, with selected funds focused on special situations and the mid-cap market sector showing robust performance.

What Next?

We are happy with the current position of our Model portfolios. However, clients that are currently making regular contributions to their Transact portfolio will receive specific advice emails.

In relation to recent feedback, the above document is a shortened version of our Market Outlook. Please click the below button to view the full version.