UK equities see first inflows for two years
Retail investors have turned positive on UK shares for the first time in more than two years, new figures show.
UK-focused funds were the best-selling by region in May, with net sales of £532 million, according to the Investment Association. It is the first time since April 2017 that UK equity funds enjoyed net inflows.
Relevance / Impact
The stronger performance for UK equity funds contrasted with weaker sales elsewhere. Overall equity funds had combined retail outflows of £78 million in May. Asia funds had net outflows of £46 million, while Japan funds had net outflows of £256 million and Europe £527 million. Global equity funds had net inflows of £282 million while North America funds had £172 million.
The Investment Association represents fund managers and has 250 member organisations who manage £7.7 trillion of assets. Its figures monitor unit trusts and open-ended fund sales. Its definition of UK equity includes “all companies funds”, “smaller companies funds”, and “equity income funds”.
The turnaround for UK funds comes amid concerns about a slowdown in the eurozone economy and the impact of a trade war between the US and China. This positivity is good news for our UK fund holdings.
Pound slumps as ministers move towards no-deal Brexit
Sterling fell to its lowest level in more than two years and bond yields tumbled as investors took flight after ministers talked up the chances of a no-deal Brexit.
In the five days since Boris Johnson became prime minister, the pound has been the worst performing leading currency in the world. Investors have been rattled by Mr Johnson’s appointment and they lack faith in his ability to renegotiate the withdrawal agreement.
The pound, which has recently dropped to its lowest level in 51 months, has fallen substantially since the EU referendum in June 2016, when it was trading at $1.50. It has shed more than 2 per cent against the dollar this month as the likelihood of Mr Johnson becoming prime minister grew.
Last week’s quarterly inflation report from the Bank of England was the last to be published before October 31. As expected, it left monetary policy on hold, with Bank rate at 0.75% and no change in the amount of quantitative easing outstanding.
Relevance / Impact
Fears about a no-deal Brexit have knocked sterling by 19 per cent to $1.21 since June 2016, when the pound traded at $1.50.
According to analysis by Pantheon Economics, the pound is 13 per cent below the level it would have been at if traders had continued to be influenced solely by interest rate expectations. It said that investors judged there to be a 35 per cent chance of a no-deal Brexit.
Analysts said that there was now a greater possibility of the pound crashing to $1.15 or lower, a level last recorded in October 2016. The fall would be steeper in the event of a no-deal Brexit, according to the Office for Budget Responsibility, the government’s forecasting body.
Sterling’s collapse helped to lift equities, however. The FTSE 100 surged by as much as 2 per cent in one day, its fastest rate in about six months, on growing confidence that a weaker pound would boost the earnings of export-reliant companies.
One major reason why the UK stock market rises when the value of sterling falls is because such a large proportion of profits for FTSE 100 companies is made in dollars. If sterling weakens then dollar revenues, once converted back into sterling, are worth more. That in turn boosts share prices and by extension the FTSE 100 index as a whole. The principle that a falling currency boosts the local stockmarket applies to most markets, but the extent depends on the market's reliance on foreign revenues. Another reason is that UK exports will be cheaper & therefore more attractive to overseas buyers.
Federal Reserve rate cut fails to win over Wall Street
The US Federal Reserve cut interest rates for the first time since the financial crisis last night, but its chairman quashed hopes of a series of reductions, sending stock markets down. The central bank trimmed its base rate by 25 basis points, to a range of 2 per cent to 2.25 per cent, in a widely expected decision that was supported by eight members of its policy committee, but was rejected by two.
Relevance / Impact
In a joint statement, the policy committee said that it had decided to cut rates “in light of the implications of global developments for the economic outlook, as well as muted inflation pressures”. It expected the economy to expand steadily, but said that “uncertainties about this outlook remain”.
The Fed’s interest rate decisions influence the cost of borrowing across the world. It last cut its base rate in 2008, holding it just above zero for seven years in an attempt to stimulate the economy after the financial crisis.
The S&P 500 share index, trading roughly flat before last week’s decision, was little changed shortly after. It went on to fall by 1.1 per cent, however, after Jerome Powell, the Fed chairman, said: “It’s not the beginning of a long series of rate cuts. You would do that if you saw real economic weakness. That’s not what we’re seeing.”
On the day of the interest rate cut, the S&P 500 closed down 32.80 points, at 2,980.38, with the Dow Jones industrial average down 1.23 per cent, or 333.75 points, to 26,864.27 and the Nasdaq index down 1.2 per cent, or 98.19 points, to 8,175.42.
Neil Woodford’s stricken fund to stay frozen until December
The crisis engulfing Neil Woodford has deepened after it was revealed that his main investment fund was likely to remain frozen until early December and the investment trust that bears his name disclosed that it was considering whether to sack him as its manager.
Link Fund Solutions Limited, the Authorised Corporate Director of the LF Woodford Equity Income Fund has formally reviewed the suspension and announced that it remains in the best interests of investors for the suspension to continue and that the suspension of dealing is likely to last until early December, trapping hundreds of thousands of investors for most of the rest of the year.
Link’s latest announcement came just hours after Woodford Patient Capital, the listed investment trust, said that it was holding talks with fund management firms that had approached it about replacing Mr Woodford as the manager of its assets.
Meanwhile, the International Stock Exchange in Guernsey has sought to distance itself from Neil Woodford by pushing out three of his investments in a move that has left his troubled Equity Income Fund in breach of rules over unlisted shares.
Relevance / Impact
The freezing of Mr Woodford’s main Equity Income fund on 03 June was the culmination of a crisis that had been brewing for months. The value of the fund’s assets, which peaked at £10.2 billion in May 2017, tumbled as a number of its investments soured and spooked investors pulled their money. It stood at just £3.7 billion by the time that Link decided to block withdrawals in an attempt to protect it from facing a torrent of investor redemption requests that would have forced Mr Woodford into a fire sale of assets.
An investor with £10,000 trapped in Woodford Equity Income has lost £888 since the fund was suspended by its high-profile manager in June. Calculations suggest that this loss will have grown to £2,220 — roughly a fifth of the total stake — by December, the earliest date at which the fund will re-open.
Reeves Independent was never selected Neile Woodford's funds for inclusion in our model investment portfolios. We are therefore able to observe without suffering any negative impact.
Why investors are going for gold
In July, the price of gold broke the $1,400 an ounce mark for the first time since 2013.
Relevance / Impact
As the central bank at the heart of the world’s largest economy, the Federal Reserve has a considerable influence on world markets and its interest rate decisions are watched closely. Even when the Fed leaves its base rate unchanged, it offers clues about its future path by publishing projections from its ten rate-setters and seven other officials.
Expectations of a rate cut have been growing amid signs of a slowdown in the economy. Following this latest decision, traders went all-in on a rate cut at the Fed’s next policy meeting in July, putting the probability at 100 per cent, up from 86 per cent before the announcement, the CME Fedwatch Tool, which tracks futures prices, showed.
This is welcome news for our proportionate exposure to US stocks & global markets generally.
Scottish Mortgage Investment Trust
The Sunday Times highlighted the this 110-year-old investment trust last month. This is a long-term core holding within our model investment portfolios.
Scottish Mortgage Investment Trust, the only investment trust in the FTSE 100 index of British blue-chip shares, favours global equities, with North American companies accounting for more than half of its £8bn assets. It looks for businesses with long-term growth potential.
Top holdings include Amazon (10.2%) and its US compatriot Netflix (3.2%), and China’s Tencent Holdings (6.9%). The top 10 holdings also include Ferrari and French luxury goods group Kering, which is home to brands such as Gucci.
Relevance / Impact
“We see profound and positive structural changes taking place [in the world], so we focus on investing in the handful of growth businesses that are driving that progress for the future,” said co-manager Tom Slater. “They offer the potential to be outstanding long-term compounding investments.”
“This long-running trust has been a consistent performer and gives access to some early-stage start-ups, such as Tesla and TransferWise,” said Laura Suter of the investment platform AJ Bell. “It is run by two experienced managers [Slater and James Anderson] who have a concentrated portfolio of about 45 stocks.”
The FTSE 100-listed trust has returned 167.9% over five years, compared with a 91.8% sector average. The yield is 0.57%.
We are retaining our long-term core holding in this highly regarded investment trust within our model investment portfolios, which continues to consistently deliver solid growth for our clients.
This article is in the opinion of Reeves Independent financial advisers only and is not intended as advice and no investment decisions. The information in this blog or any response to comments should not be regarded as final advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding at June 2019.