Market Outlook Report – June 2017


So, we've had another election and received another surprise. As far as financial markets are concerned, we saw an initial modest sell-off in sterling, which, with the same knee-jerk reaction we saw after the Brexit vote, boosted the share prices of the large dollar-earning businesses that dominate the UK stock market. Ultimately, on the day of the election result, the City appeared to shrug off news of a hung parliament, with the London stock market finishing a volatile day of trading on the rise. The FTSE 100 rose 77 points, after the election result sent the pound to a seven-week low, hitting its lowest level since Theresa May called the election on April 18. This however, pales into insignificance compared with the 15 per cent it dropped in the aftermath of the Brexit vote.


Since then, there has been a series of record-breaking closing highs, with the FTSE 250 setting its most recent peak last month, when it smashed through the 20,000 milestone to finish at 20,024.92. This month’s anniversary of the UK’s vote to leave the EU was marked by European equities slipping and UK stocks struggling — the FTSE 100 slumped to a six-week low yesterday morning. The FTSE 100 had its longest run of weekly losses in a year as it fell from opening at 7,463.54 on Monday to closing at 7,424.13 on Friday last week.

From the perspective of our investment strategy, the election outcome requires no major changes. The fundamentals of the diversified range of funds within our model portfolios remain very attractive. We remain somewhat cautious on the outlook for the global economy, but more positive about the prospects for the domestic economy, despite ongoing political challenges facing a weakened government . If anything, with its implications for looser fiscal policy and a softer Brexit, the election result provides some reassurance about the UK economic outlook and our investment portfolios are positioned to benefit from this outcome over the long term.


The growth of business activity across the eurozone slowed unexpectedly last month, as a stalling services sector offset the strongest showing by manufacturers in more than six years. The latest IHS Markit composite purchasing managers’ index gave a reading of 55.7, down from 56.8 registered in both May and April, the highest since April 2011. Any number above 50 indicates growth. Economists had forecast a far healthier reading of 56.6 and none had predicted such a large fall. However, with growth in the eurozone still in positive territory, most experts remained untroubled.

The IHS Markit Flash Eurozone PMI Composite Output Index fell to 55.7 in June 2017 from a six-year high of 56.8 in May and below market expectations of 56.6.

Business confidence in Germany has soared to another all-time high as companies see a rosy future for the European economy despite Brexit. The Institute for Economic research (Ifo) in Munich said that its monthly confidence index was up from a record 114.6 points in May to 115.1 points in June. Analysts had been expecting a slight fall. Ifo’s index is calculated on the basis of 7,000 company views of both the current situation and the outlook for the coming six months. Both elements rose in June.

We have maintained our proportionate asset allocation within our selected European funds (JPMorgan European Smaller Comp Ord, Lazard European Smaller Coms C Acc, Schroder European Sm Cos Z Acc & Threadneedle Eurp Smlr Coms Z Inc GBP), which continue to perform well, with the prospect of further growth.


The US Federal Reserve has raised interest rates for the second time this year as policymakers published their most detailed plan yet for trimming the central bank’s $4.5 trillion balance sheet. In a decision that was widely expected, the federal open market committee (FOMC), the Fed’s policymaking body, voted by eight to one to raise the federal funds rate range by a quarter of a percentage point to 1.25 per cent. The committee’s economic projections, published alongside the rates decision, pointed to one further rise this year.

The Federal Reserve raised the target range for its federal funds rate by 25bps to 1 percent to 1.25 percent during its June 2017 meeting, in line with market expectations.

Reeves Independent isn’t having to react to growing political unease concerning the Trump administration’ having already proactively pre-empted it by reducing our exposure to US equities, following our monthly Investment Team meeting in March.

Electra Private Equity PLC

Earlier this year, we identified and selected a new investment trust company, Electra Private Equity PLC, which we introduced to our Adventurous & Aggressive investment portfolios. The company subsequently paid out a £1.0 billion special dividend, representing 2,612p per share, to registered shareholders as at the close of business on 7 April 2017. This special dividend represented a yield of 53.09%.

In June, a second special dividend of £350 million (914p per share) was announced, which is payable on 14 July to shareholders on the register on 9 June. This followed the announcement on 25 May 2017 of Unaudited Results for the Six Months ended 31 March 2017. The results highlighted continued strong performance, with a total return of 10% for the six-month period and 30% over the previous twelve months. The share price at that time was 4,951p, and had enjoyed a total return of 18% for the period, compared with 8% for the FTSE All-Share Index.

Essentially, the company Board is again returning excess capital to shareholders. As with the previous (£1.0 billion) special dividend which was announced on 28 March 2017, there was an automatic market price adjustment to reflect the fact that a further £350m of cash is being returned to shareholders and shares purchased now won’t qualify for this (second) special dividend. This is backed up by the sums, with Electra's market capitalisation falling by £348m from £1.058bn to £710m on 09 June, reflecting the £350m second special dividend.

A spokesperson for the company explained that the special dividend inevitably caused proportionate market recalibrations in the share price, but stressed that this is not a cause for alarm.We remain firm supporters of the strongly performing investment trust company, which has delivered remarkable results for our investors over a short period of time and provides excellent prospects for ongoing investment returns.

Scottish Mortgage Investment Trust PLC

Another recently selected investment trust company which we introduced to our introduced to our model Balanced/Adventurous investment portfolios is Scottish Mortgage Investment Trust PLC. It invests globally, looking for strong businesses with above-average returns. Scottish Mortgage Investment Trust is managed by Baillie Gifford & Co Limited, the Edinburgh-based investment management partnership. Scottish Mortgage Investment Trust PLC is the UK’s largest conventional investment trust with gross assets in excess of £5 billion, and it entered the FTSE 100 index for the first time in its history at the close of business on 17 March 2017.

Scottish Mortgage enjoys one of the lowest ongoing charges levels in the sector with an ongoing charge of 0.45% for the year to 31 March 2016. Evidently, the company’s Board and fund Managers share our view at Reeves Independent that low ongoing charges are fundamentally important to enhancing long term returns for all investors.

This is another of our recently introduced funds, which has delivered very pleasing returns for our clients.

Frontier Markets

A number of experts believe now is the time to look beyond the big industrial nations and emerging economies to invest in frontier markets. There is no universal definition of what constitutes a frontier market, but it is essentially nations that are economically less developed than emerging market countries; a country which is more economically advanced than the least developed countries, but too small to be generally considered an emerging market. The term is an economic term which was coined by International Finance Corporation's Farida Khambata in 1992. Emerging markets are in countries that account for 12 per cent of the world’s population and generate 4 per cent of global economic output, yet they are generally ignored. Some frontier market countries were emerging markets in the past, but have regressed to frontier status.

Frontier markets have not yet been through the transformation of emerging markets. In many cases trends such as urbanisation, population growth and globalisation are only just beginning to have an impact, which provides opportunity for investors. Frontier market economies are at an earlier stage of the development cycle — where emerging markets were, say, 20 years ago. They include Asian nations such as Bangladesh, Pakistan, Sri Lanka and Vietnam, but also African countries such as Botswana, Ghana, Kenya and Morocco, states in the Middle East such as Bahrain, Jordan, Kuwait and Qatar, and Argentina in Latin America.

While it is wise to be wary of the dangers of investing individually in these markets, frontier markets as an asset class may be less risky than investors imagine. One advantage is that they are less connected through globalisation, so individual markets trade independently of one another. The availability of bank finance to small businesses in Bulgaria, say, has no effect on demand for a Botswanan retailer’s products. For this reason funds that are diversified across a number of frontier markets are often less volatile than supposedly safer funds, which invest across markets that move in unison.

Equally, frontier markets offer fund managers greater opportunities to spot ideas, trends and successful businesses that other investors have missed. Many emerging markets are so well-known by a global investment audience that fund managers find it almost impossible to beat the average.

Add the potential for portfolio diversification and the macro-economic backdrop, and the arguments for investors able to take a long-term view are even more compelling. The performance of frontier markets has been strong. Converting returns back into pounds for UK investors, the MSCI Frontier Markets Index rose by 70.4 per cent over the five years to the end of April. In contrast, the MSCI Emerging Markets Index was up by 32.8 per cent.Fund managers see an increasing opportunity here. Last month Jupiter Asset Management raised almost £90 million from investors for a new fund that will invest a substantial chunk of its assets in frontier markets. Franklin Templeton has announced plans to reopen its $800 million (£683 million) Frontier Markets fund to new investments after closing it in 2013.

The Reeves Independent Investment Management Team identified this sector as an attractive opportunity earlier this year and introduced the BlackRock Frontiers Investment Trust PLC into our model Balanced investment portfolio. BlackRock Frontiers Investment Trust PLC is the best performing frontiers investment trust over the past 3 years. It’s up 10% over the past 6 months and 38% over 3 years.