Investors pile back into shares
Investors around the world poured money into stock market funds last week at the fastest rate in a year, hoping to exploit the continuing rebound from December’s market sell-off.
Equity funds received net inflows of $14.2bn (£10.7bn), the most since March last year, according to analysis by Bank of America Merrill Lynch. Many investors who have been wary about the stock market recovery this year are now turning bullish, the bank said.
Wall Street’s S&P 500 index is up more than 12% this year, closing in on September’s all-time high. British stocks have followed, with the FTSE 100 up 7% this year despite the Brexit chaos.
In the past, a rush of cash into stock markets has tended to foreshadow a big sell-off. However, the Bank of America analysts said it would take a few more weeks of hefty inflows to push markets towards “excess bullishness”.
The US Federal Reserve bolstered the turnaround in mid-March by keeping interest rates on hold and indicating that just one increase in rates is planned this year.
Federal Reserve chairman Jerome Powell said recently that he was in “no hurry to change rate policy”. Although the American economy remains relatively robust, Powell has sounded an alarm over risks from lower growth in Europe and China.
OECD cuts global growth forecast over trade wars and Brexit
The Organisation for Economic Co-operation and Development cut its growth projections for almost every economy in the G20 for the next two years.
Despite the reduction in the projected growth rate, the OECD believes that Britain’s GDP will improve faster than that of Germany, raising the possibility that it will outpace the largest economy in Europe.
The OECD lopped 0.8 of a percentage point off its growth forecast for the eurozone to 1 per cent this year, rising to 1.2 per cent in 2020. It blamed weak industrial output, softer demand and falling business confidence for the cut. Whilst this is not positive news, the markets are way ahead of the game in terms of its predictions & expectations and such sentiment has long been absorbed into share valuations.
Eurozone slowdown forces ECB to revive stimulus
Europe’s banks are to be flooded with another round of state-subsidised loans this year after the European Central Bank scrapped plans to tighten monetary policy in the face of collapsing eurozone growth.
The decision to reverse policy just months after the bank ended its €2.6 trillion quantitative easing programme underscored the fragile state of the eurozone, which enjoyed a resurgence for about 20 months from 2016.
Interest rates will be left unchanged in the bloc until at least 2020, the bank said as it abandoned plans for a rise after the summer. It will also relaunch a cheap funding scheme that is likely to deliver commercial banks hundreds of billions of euros in subsidised loans.
Markets reacted immediately to the surprise stimulus announcement at the beginning of March. Eurozone bond prices picked up, sending two-year Italian government borrowing costs down 14 basis points to 0.128, the lowest level since 2018.
Prospects for European stock markets
Shrewd commentators believe that the general gloom surrounding Brexit and the European economy have created an opportunity for sharp-eyed investors to buy valuable European stocks cheaply.
Grim political outlook could present investors in European stocks with a buying opportunity, says Vincent Ropers, the manager of TB Wise Multi-Asset Growth, a global growth fund. He says: “We feel it would be negligent on our part not to use the current period of uncertainty to invest in assets which are clearly mis-priced as a result of Brexit-related concerns.”
Jason Hollands of Tilney Group, a wealth manager, goes for Jupiter European fund and FP Crux European Special Situations fund. He says: “The Jupiter fund invests in 40 predominantly larger companies and targets growth irrespective of the economic cycle. Holdings include Adidas and Novo Nordisk, the pharmaceutical company. The FP Crux fund, unlike the Jupiter, includes exposure to medium-sized and smaller businesses and has a preference for dividend paying companies. Holdings include Swedish lift manufacturer Kone, property firm Aroundtown, and healthcare group Novartis.
Annabel Herman, of Winterflood Securities, the stockbroker, picks Fidelity European Values and Jupiter European Opportunities. She says: “The Fidelity fund has generated a strong track record under Sam Morse. It has a bias towards quality and growth. The Jupiter fund has impressive returns, partly through its search for ‘special’ companies. The manager’s focus on global businesses that are not dependent on governments or regulators should mean that performance is less reliant on the strength of the European economy.”
Search for safe havens sends bond yields down
Government borrowing costs have dropped to their lowest level in 18 months after doveish signals for growth from the US Federal Reserve and the rising threat of a no-deal Brexit. After a two-day meeting, policymakers in Washington unanimously voted to leave the US interest rate range at between 2.25 per cent and 2.5 per cent in March. They changed their outlook for 2019 from two rises to none.
The Bank of England also voted unanimously to hold rates at 0.75 per cent and left quantitative easing unchanged at £435 billion. It also upgraded its growth forecast for the first quarter to 0.3 per cent from the 0.2 per cent it predicted in February.
Consequently, in March Britain’s ten-year gilt yield fell to its lowest level since September 2017 as investors piled into sovereign debt across the West, from Germany to the US, after the Fed’s surprise decision to scale back its plans for rates rises.
The yield on 10-year British gilts — bonds issued by the government — fell more than ten basis points to 1.099 per cent. It was the steepest one-day decline in just over two years. Bond yields fall as bond prices rise, which happened yesterday as investors bought bonds amid fears that global economic conditions are deteriorating.
In the eurozone, where there are concerns about Brexit and slowing growth, long-dated bond yields fell as much as six basis points. At 0.04 per cent, Germany’s 10-year bond yield fell to its lowest level since 2016. The yield on 30-year gilts deepened to its lowest level since October 2016 at 1.584 per cent.
Seeking returns from safer fixed rate bonds as an alternative to equity investments is now extremely challenging. Holding high-yielding, high quality equities for the long term is a sensible alternative, if the investor has a longer-term investment horizon. Fixed-interest options for those nearing retirement offer poor returns at the moment, with no foreseeable sign of improvement.
For a fund that will take flight, pick one run by a wise old owl
Out of 1,400 unit trusts with a 10-year track record, 7 of the top 10 managers have spent more than a decade in charge.
8 of the 10 unit trusts in the UK all companies sector with the best 10-year performance are run by managers who have been in charge for more than a decade.
Funds that epitomise these findings (from the investment committee at Shore Financial Planning) include Fidelity UK Smaller Companies, the top-performing unit trust over 10 years with a 648% rise, which has been run by Alex Wright since 2008. Rathbone Global Opportunities, the third-best performer in the global sector, having grown 375%, has been managed by James Thomson for 16 years.
Schroder Asian Alpha Plus is the top performer in the Asia region excluding Japan. Matthew Dobbs, the manager since 2007, has posted a 404% increase over 10 years. Ben Yearsley, who chairs the investment committee at Shore Financial Planning says there is similar “longevity bias” among the managers of investment trusts, where 10 of the 14 top performers over the past decade have had the same stock-pickers in charge throughout that period.
Darius McDermott, managing director of Chelsea Financial Services, quantifies the long-stayers’ superiority over newer, inexperienced fund managers another way. Managers with more than 10 years under their belts generated an average return of 258% in the UK all companies sector, compared with an average of 212% for all managers.
Chelsea’s research suggests the out-performance is even greater among small companies, which tend to be less well researched than big businesses. Smaller companies funds with managers of more than 10 years’ standing delivered total returns of 422% on average against 363% from all managers in the sector.
Ben Yearsley, who chairs the investment committee at Shore Financial Planning says “Our research is not saying you should avoid funds with a shorter manager tenure, just that the stats suggest managers who stick around have performed better over the long term as compared with funds where the manager has chopped and changed.
The Reeves Independent Investment Team is always mindful and respectful of quality funds with an established pedigree and proven, consistent long-term track record. When a manager stays with a fund and a company for a decade it is also a sign that they are happy and the management team is stable — conditions that are conducive to further out-performance.
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 March 2019.