Market Outlook Report – February 2018

Market Overview

February 2018

Everything was perhaps going a little too smoothly before global markets hit a rough patch in early February.  There have been a range of explanations offered for this, but the US was at the epicentre of market stress, following further indications of inflationary pressures and higher interest rates.

The MSCI global equity index subsequently lost 9% of its value in the space of a week, as the global market slashed billions from the value of investments.

Experts blamed the market correction on the threat of rising inflation which will ensure that the US Federal Reserve continues to raise interest rates — possibly at a faster rate than expected.  As central banks wind down their quantitative easing policies, which provided the liquidity that fuelled share-price rises, investors are worrying about what will underpin the markets in the future.

The market downturn was exacerbated by technical issues, with many believing that ‘systematic, volatility constrained trading strategies’ compounded the downward spiral.  Also known as algorithmic, or black box trading, it is a system based on the use of complex mathematical models and formulas which enable professional (typically institutional) investors to make automated transactions.  Some commentators have suggested that these trading models and sophisticated algorithms are partly to blame for the volatility witnessed across markets last week.  Banks and hedge funds have subsequently been ordered to tighten their controls over computer-driven trading.  Economists are warning that the rollercoaster ride of volatility is likely to continue.

The following graph helps to put recent events into perspective:

The Reeves Investment Team will continue to analyse market trends, comments & events and monitor the performance and future prospects of the individual funds held within our model portfolios, with the aim of beating our underlying benchmark of the FTSE All-Share Index.

Reeves model investment portfolioS 

Once again, all of our model investment portfolios have performed better than our FTSE All-Share Index benchmark during February.  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 (as happened in January).  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.  This is exactly what happened in February, as reflected in the graph below.  Moreover and very importantly, all of our model portfolios performed better than the FTSE All-Share Index benchmark during February.

Portfolio performance vs FTSE Allshare

Also of note is the fact that all but one of the considerable number of funds held within all three model portfolios outperformed the FTSE All-Share index, as at the date of our Investment Team meeting on Thursday 22 February.

During our monthly Investment Team meeting, the Reeves Investment Team met with a Regional Representative for AXA Investment Managers UK Limited.  The meeting focused on the 3 investment funds which we currently hold within our model portfolios, namely AXA Framlington Biotech GBP Z Acc, AXA Framlington Financial Rl Acc & AXA Framlington Global Technology Z Acc.  All three AXA Framlington funds have produced strong positive returns and continue to perform well.  The AXA Framlington Biotech GBP Z Acc maybe pausing for breath, but it has consistently outperformed its benchmark (‘IA Specialist’) by some considerable margin and the future prospects for biotech developments already in the pipeline offer the prospect of further opportunities for further positive returns.

Having made a number of strategic changes to our model investment portfolios in January, we are now allowing time for these changes to bed in and for the markets to settle down and regain their equilibrium.  We therefore do not propose to make any further changes at this time.

As stated above, our model portfolios are performing well and behaving as we would expect in different market conditions.  As more volatility is expected in coming months, we feel that our model investment portfolios are well-placed to continue performing in a similar fashion, depending on which direction the market goes and the underlying risk profile of each portfolio.

Meanwhile, we are pleased with the changes we made last month, namely increasing our exposure to emerging markets & Europe, reducing our cash balance and buying in to a market correction, and selling our direct exposure to the oil market.  During February, European stocks posted their best week since 2016, following the temporary global sell off in early February.  “Europe has jumped higher out of the blocks,” said Fiona Cincotta, market analyst at City Index, in a note.  “This indicates that the market has quickly adjusted to the prospect of higher future inflation and a more hawkish Fed.  Let’s not forget, the backdrop hasn’t changed, earnings remain strong and company outlook’s encouraging,” she said.

Also responding to this month’s market correction, Justin Urquhart-Stewart, co-founder of Seven Investment Management made the following observations: “As far as buying opportunities are concerned, the UK mid-cap sector is, for the first time in a long while, cheaper than the large caps.  There hasn’t been a better moment to buy domestic British stocks in years, as long as you can hold your nose on the Brexit negotiations.”  In addition, “A number of [overseas] markets look relatively inexpensive, usually because the initial reaction is one of fear.  Many European banks trade at less than their book value, and many frontier markets such as Vietnam and Argentina, while seeming scary, have solid fundamentals for the long term.”

These comments support our selection & strategic long-term retention of the JPMorgan Mid Cap Investment Trust plc (which has increased in value by around 26% over the past year even after the recent market correction) and BlackRock Frontiers Investment Trust plc (which has increased in value by around 16.5% over the past year; 9.5% over the past 6 months).  Urquhart-Stewart’s comments also support our recent strategic investment decisions, which have strengthened our exposure to Europe and consolidated our exposure to global emerging markets, via the Aberdeen Emerging Markets Investment Company Limited.

Evidently, the Reeves Investment Team has the capacity & expertise to identify the right sectors and best individual funds at the right time.  The obvious ongoing challenge is to get it right every time, which we steadfastly strive to achieve.