Recent Market Rebound
During May, leading shares hit a record high. The FTSE 100 index closed up 53.77 points at 7,787.97 on 17 May, just breaching the previous record set in mid-January of 7,778.64. The FTSE 250 index also reached a record high, up 190.65 points on the day to 21,019.44.
The FTSE 100 has staged a remarkable recovery, gaining 13.05 per cent since it hit a low for the year of 6,888.69 in late March. Analysts believed at the time that shares were overvalued as the economy was beginning to slow and that investors should prepare for further drops. The index has risen nearly 23 per cent since the Brexit vote, despite the outcome sparking fears that company profits would fall heavily and the economy would tumble into recession.
It is clear that UK companies are continuing to turn in an impressive performance and this is reflected in the latest Profit Watch study from the Share Centre, a stockbroker. They posted record profits of £153 billion in the first quarter of 2018, up 158 per cent on the same quarter last year, while sales climbed 20 per cent to a three-year high of £1.3 trillion. Helal Miah of The Share Centre says: “UK plc has delivered the strongest set of results in years. Strong economic expansion around the world, coupled with positive exchange-rate effects, has proved a powerful shot in the arm for multinationals. Home-grown companies may not, on the whole, have matched their international peers, but they too have done well.”
This is clearly good news for our model investment portfolios, boosting the value of many of our selected funds and therefore overall value of our clients’ pension pots.
During May, official inflation figures came in below expectations. The annual consumer prices index dropped to 2.4 per cent in April from 2.5 per cent in March, undershooting forecasts that it would be unchanged.
The Office for National Statistics said that it was the lowest reading since March last year, when inflation was surging due to the currency’s collapse after the Brexit referendum.
Although the drop was good news for households —for whom incomes are rising in real terms after almost a year of deteriorating living standards — it hit currency markets, with slipping to its lowest since 21 December 2017.
The fall in the rate of inflation makes an imminent interest rate rise less likely and government borrowing costs fell on the prospect of interest rates being low for longer. Generally, the stock market responds well to low inflation and particularly to continued lower interest rates, as it helps to support consumer demand & confidence, which is good for UK businesses. The UK stock market also likes the resulting fall in the value of sterling, as it makes UK exports cheaper for overseas buyers.
This is further positive news for our model investment portfolios, boosting the value of many of our selected funds and therefore the overall value of our clients’ pension investments.
Impact of Political Turmoil in Italy & Spain
Late last week, Italy’s anti-establishment parties revived a coalition deal, removing the risk of new elections. Italy has been trying to form a government since inconclusive elections in March. Markets were unsettled by the recent collapse of the fledgling populist coalition after President Mattarella vetoed the appointment of a Eurosceptic economy minister. This raised the prospect of another election as early as July that could become a proxy vote for membership of the euro. The potential upheaval caused a sell-off in Italian assets over the past four days and bond yields to rise because of increased riks and market uncertainty.
Markets have also been spooked by political turmoil in Spain, where Pedro Sánchez, a socialist, has taken over as prime minister. Spanish bond yields had been rising this week amid concerns that it, too, may face a snap election after a parliamentary vote of no-confidence in Mariano Rajoy, the prime minister. Those concerns eased on Friday
The Reeves Investment Team has been monitoring developments closely. We are not minded to try and be clever by taking a short-term speculative investment position specifically to exploit the current volatility, for the following reasons:
Commercial Property Landlords in revolt over growing 'abuse' of CVA insolvency plans
An insolvency procedure that has been used this year by high street brands including New Look, Carpetright and Jamie’s Italian is in urgent need of overhaul, industry bodies have claimed. Lobbyists for insolvency practitioners and restructuring advisers are calling for reform of company voluntary arrangements, which allow retailers to cut rents and to shut sites typically at landlords’ expense.
UK Property represents 21% of our model our Balanced portfolio. including REITs - we currently hold investments in 8 different property-related funds (out of 37, i.e. 22% of the individual funds within the Balanced portfolio), namely:
The Reeves Investment Team has consider the impact of the growing popularity of Company Voluntary Arrangements (‘CVAs’) - a form of insolvency that allows commercial tenants (usually retailers) to shut stores and cut rents, which are undermining the commercial property market.
Most (but not all) of our selected property investments are specialist funds focussed on specific property types (e.g. purpose built university campus student accommodation, primary healthcare properties, large logistics facilities & residential property). Therefore, whilst we are aware of the growing challenges facing the UK commercial property market, and in particular the growing impact of CVAs, we are not overly alarmed at how this may affect our diversified portfolio of property funds. However, it is an issue we are closely monitoring and we are minded to review and possibly overhaul of our property investments, to reduce the number of property funds we invest in and consolidate our investments by focussing on those funds offering a proven & consistent superior performance. This specific exercise was discussed during our monthly Investment Team Meeting in May and will be discussed further.
Baille Gifford Shin Nippon investment trust 5:1 share split
The Baillie Gifford Shin Nippon investment trust has undergone a 5:1 share split, following a consistently impressive performance over recent years (a 46.1% increase in its NAV over the year to 31 January 2018 and a 54.2% increase in its share price over that period). By contrast, its comparative index, the MSCI Japan Small Cap Index, rose by just 17%. On a rolling three year basis, Shin Nippon’s NAV rose by 145.5% and its share price by 187.2% versus 75.0% for the MSCI Japan Small Cap Index.
As the investment trust's chairman points out, this fund is now one of the top three performing trusts of any type over three, five and ten years. He is also “encouraged by the outlook”.
There is no immediate concern with the Shin Nippon (smaller Japanese) market, the way the fund is being managed nor the consistent returns it is generating. The Board has approved a modest amendment to the investment policy to allow an increase in the individual holding size at time of purchase from 3% to 5% of total assets.
The share split should have no material effect on the pro rata price per share, on the profitability of the company, or anything else (apart from the expectation that smaller investors will buy more. Large investors will not be noticeably affected). This is a core, extremely well-managed fund in a specialist area which has consistently performed well (up 12% over 6 months & 41% over 1 year). We will therefore be retaining this fund within our model investment portfolios.
EU Hits back at Trumps amid Escalating Fear of Trade War
Brussels has hit back at President Trump’s protectionist tariffs on steel and aluminium imports by launching a legal challenge at the World Trade Organisation and threatening further counter-measures. This move comes after Mr Trump announced tariffs of 25 per cent on 1,333 Chinese products in April in retaliation for Beijing’s “intellectual property theft”.
In a tit-for-tat move that has fuelled tensions over the risk of a full-blown global trade war, the European Union sent a formal complaint to the World Trade Organisation over America’s 25 per cent tariff on European steel and 10 per cent tariff on aluminium. The WTO is a global referee in trade disputes. The EU considers the US tariffs to be illegal.
At the same time, the European bloc published a ten-page document of US goods upon which it may impose retaliatory tariffs. This ranges from Harley Davidson motorcycles to corn, cranberries, peanut butter and bourbon whiskey. The list of goods the EU is targeting are mostly produced in areas set to be hotly contested in the forthcoming US midterm elections and are thought to have been deliberately selected to cause the biggest problems for the US administration.
The levies would come into effect by June 20 and would affect around €2.8 billion of US exports to Europe, in contrast with US tariffs on European metals worth €6.4 billion.
The EU also revealed that it was siding with the US on a different international issue as it launched legal action against China at the WTO over a battle about intellectual property. The EU is challenging China’s insistence that European companies operating in its country give up the ownership and usage rights of their technology to domestic Chinese companies as the price of doing business there.
The moves by the US and the EU were mostly shrugged off by the markets, with European shares rallying after a week of volatility caused by political instability in Italy. The FTSE 100 closed up 0.31 per cent, while Italy’s FTSE MIB Index closed up 1.49 per cent. In the US, markets rallied after the release of strong jobs figures. The S&P 500 index erased its losses for the week, while the dollar headed for a seventh straight week of gains, its longest streak since 2014.
Therefore, there has been no immediate impact on our investment fund holdings, although the risk of further escalation into a full-blown global trade war is an ongoing issue which the Reeves Investment Team (along with the wider international investment community) is monitoring.
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 2018.